Environmental Tax, SME Financing Constraint, and Innovation: Evidence From OECD Countries

This article examines the impact of an environmental tax on small and medium enterprise (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 article 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 article indicate that an increase in environmental tax leads to a decrease in SME innovation. Furthermore, 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.

Managerial Relevance Statement: This article aims to create awareness amongst managers of the implication of environmental tax on SMEs financing constraints, thereby requiring managerial decisions and strategies to avoid attracting environmental taxes to help them innovate. Thus, the results of this article will assist SMEs managers in responding to the impact of environmental taxes by pursuing policies that mitigate the impact of environmental taxes. Besides, evidence of how SMEs. financing constraint moderates the relationship between environmental tax and SMEs. innovation has been provided in this article to guide managers.