Does international green finance accelerate green innovation? Catalysts for fostering CO2 reduction in developing economies

While domestic green finance is widely recognized for its role in fostering green innovation and supporting climate change mitigation, the impact of international green finance (IGF) remains critical, particularly for developing economies where external finance inflows can catalyse transitions toward low-carbon development. This study investigates the long- run and short-run effects of IGF on green innovation and further examines the influence of green innovation on carbon dioxide (CO2) emissions across a panel of 76 developing countries from 2000 to 2019. Using second-generation panel cointegration and the vector error correction mechanism, our findings reveal a nonlinear long-run relationship between IGF and total innovation, indicating that IGF must exceed a threshold before significantly boosting total innovation in developing economies. We also identify an inverted U-shaped relationship between IGF and green innovation, in which the positive effects of IGF diminish beyond a certain point. Crucially, IGF emerges as a significant driver of CO2 emissions reduction in both the short- and long-run. While total innovation is associated with increased emissions over the long term, green innovation contributes to a substantial and sustained decrease in CO2 emissions. These results emphasize the need to design targeted policies that prioritize green innovation and scale up IGF to support sustainable growth in developing countries.