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Financing Energy Innovation: Internal Finance and the Direction of Technical Change

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  • Joelle Noailly; Roger Smeets

Abstract

Achieving the goals of the Paris Agreement and of climate neutrality by 2050 in the European Union will require mobilizing financial investments towards clean energy innovation. This study examines the role of internal finance (cash flows and cash holdings) and financing constraints for innovation in energy technologies. We construct a dataset for 1,300 European firms combining balance-sheet information and patenting activities in renewable (REN) and fossil-fuel (FF) technologies and estimate the sensitivity of patenting activities to firm’s internal finance. We use count estimation techniques and control for a large set of firm-specific characteristics and market developments in REN and FF technologies. We find that patenting activities of firms specialized in REN innovation are significantly more sensitive to a shock in cash flows than firms specializing in FF innovation. Hence, our results emphasize that innovative firms in clean energy may be particularly vulnerable to financing constraints. We discuss the implications of these results for energy transition policies aiming to redirect finance towards clean energy R&D.

Suggested Citation

  • Joelle Noailly; Roger Smeets, 2021. "Financing Energy Innovation: Internal Finance and the Direction of Technical Change," CIES Research Paper series 69-2021, Centre for International Environmental Studies, The Graduate Institute.
    • Handle: RePEc:gii:ciesrp:cies_rp_69
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