Financial constraints-energy efficiency nexus in European Union manufacturing sector: The moderating role of research and development

Financing risk remains one of the significant challenges in clean energy projects due to heavy investment requirements, limited financing, unpredictability of future revenues and market instability. Against this backdrop, the present work is an effort to offer further insights into the relationship between industries’ financial constraints and energy efficiency by incorporating the moderating role of research and development. To investigate this relationship, we use industry-level data for twenty-two manufacturing sectors in seven European countries. Our findings from the High-dimensional fixed effect model reveal that energy intensity (energy efficiency) increases (decreases) with the increasing share of financially constrained firms in an industry. Moreover, increasing R&D intensity in an industry lessens the adverse impact of FCs on energy efficiency. The results remain robust under other specifications employing alternative measures of financial constraints. These findings emphasise the innovation funding programs like Horizon Europe to enhance energy efficiency, especially for financially constrained firms.