Environmental Tax, SME Financing Constraint and Innovation. Evidence from OECD Countries

This paper examines the impact of environmental tax on SME innovation and how SME financing constraint moderates this relationship. Given the paucity of research on the implications of financing constraints on SMEs’ green innovative activities, the study adopts cross-country panel data to investigate the impact of environmental tax on SME’s innovative activities across 24 OECD countries for the period 2000-2019. Results from our study indicate that an increase in environmental tax leads to a decrease in SME innovation. Further, we also find that financing constraint positively moderates the relationship between environmental tax and SME innovation. Our findings shed new light on the theoretical and practical implications of financing constraints on SMEs’ green innovative activities.