Loaning scale and government subsidy for promoting green innovation,☆☆

https://doi.org/10.1016/j.techfore.2019.04.023Get rights and content

Highlights

  • Game models are established to capture the cooperation among enterprise, bank and government.

  • The enterprise is willing to apply for loan from the bank if the loaning interest rate is lower than some threshold value.

  • The bank should approve the loan for the enterprise with an appropriate loaning scale higher than some threshold value.

  • Government subsidy is an effective intervention way to improve the environmental quality.

Abstract

Green innovation has attracted worldwide attention in the past decades. In this paper, we develop series of game models to address the effects of green loans and government subsidies on green innovation activities of enterprises. We derive a threshold value for loaning interest rate. If the interest rate of the green loan is lower than this threshold value, then the enterprises are willing to accept the loan from the bank and implement green innovation. By defining a measure for environmental effect of productive activities, we obtain a threshold value for the loaning scale. If the loaning scale is larger than this threshold value, then it meets the purpose of green loan to improve the environmental quality. We prove the effectiveness of government subsidies as an intervention way in supporting green innovation and environmental protection.

Introduction

Green innovation has been paid much attention due to the tendency of sustainable development. To clarify the notion “green innovation”, Driessen and Hillebrand (2002) proposed a rather “pragmatic definition” interpreting that green innovation should yield significant environmental benefits. Chen et al. (2006) defined green innovation as hardware and software innovation related to green products. Green innovation includes the technique innovation involving in energy saving, pollution prevention, waste recycling, design for green products, environmental management so forth. In the past several years, the importance of green innovation management has been growing in both practice and academia (Schiederig et al., 2012). With the shortage of the resources, the construction of green innovation system and promotion of green innovation performance have played important roles in the sustainable development. In environmental protection, green innovation could show positive impacts on the environmental performance. From the viewpoint of strategic management, green innovation enables enterprises, banks and governments to coordinate their developments. These drive us focusing on the study of green innovation. In an open economy, green innovation of a country or industry is increasingly influenced by the external environment, especially the performance of banks and government (Dutz and Sharma, 2012; Jänicke, 2012; Lewis, 2012).

Green loan is considered as a special financing way supporting green innovation. Some existing literatures have shown that external financing, where banks play key roles, has a major impact on technique innovations of enterprises (Benfratello et al., 2008; Brown et al., 2013; Kenney, 2011; Qamruzzaman and Wei, 2018). Green loans provide start-up funds of green innovation for small and medium sized enterprises with weak financial strength, which increases the viability of these enterprises in the peer competition. Benfratello et al. (2008) proved that banking development affects the successful probability of process innovation, particularly for enterprises who are high-tech or more dependent upon external finance. Xin et al. (2017) studied a provincial and industry-level innovation dataset and regional lending structure in China's credit market from 1999 to 2007. They found that bank loans have significantly increased the level of innovation. Hsu et al. (2014) and Hawkins and Kuang (2017) showed that industries which are more dependent on external finance and more high-tech intensive exhibit a disproportionately higher innovation level in countries with better developed equity markets. The work of Amore et al. (2013) shows that banking development plays an important role in technique progress and deregulation has a significantly positive impact on the quantity and quality of innovation activities. Kim and Park (2016) pointed out that financial development leads to a reduction of CO2 emissions by addressing the role of financial market in deploying renewable energy. Therefore, there is a positive correlation between the green loans and the innovation of enterprises (Nanda and Nicholas, 2014; Zhuang, 2013).

The government charges the social responsibility in environmental protection and sustainable development. It incents enterprises to transform from high-energy consumption and high-pollution process flows to sustainable green innovative mode through regulatory and incentive measures. Moreover, the enhancement of intensities and ranges of government subsidies could regulate the quantity and quality of green innovation and then accelerate the development of green innovation system. Paramati et al. (2016) showed that policymakers and governments in emerging market economies should encourage green innovation projects through providing favorable incentives. Berrone et al. (2013) believed that regulatory pressure has a positive impact on green innovation of enterprises. Monasterolo and Raberto (2018) developed the EIRIN flow-of-funds behavioral model to simulate the introduction of green fiscal policies and showed that green public policies can promote green growth. Gerlach and Zheng (2018) believed that optimal incentive management means weighing the benefits of providing green production and effective incentives for the business. Van Leeuwen and Mohnen (2017) showed that environmental regulation contributes to ecological investment and ecological innovation. In order to alleviate environmental pressure more directly, the government promotes the development of green innovation through subsidies (Acemoglu et al., 2016; Chen and Nie, 2016; Dzonzi-Undi and Li, 2016). Enterprises could reduce costs of funds through subsidies and thus are more willing to conduct green innovation. Wang et al. (2017) pointed out that green insurance subsidies and government subsidies improve intentions of enterprises to innovation. Liu and Liao (2017) illustrated that green loan policies effectively curb investment in energy intensive industry and adjust relatively poor production structure. Li et al. (2018) considered government subsidy for green loan and technique innovation. Tsai and Liao (2017) showed that enterprises are more likely to adopt environmental strategies to improve the ecological quality under a high level of market demand and government subsidies.

It is imperative to support enterprises realizing green innovation by providing loans with low interest rates and subsidizing environmentally friendly projects. Enterprises lack the incentive to innovate since business innovations are usually accompanied with high inputs and high risks. Through green innovation, enterprises could not only achieve excess earnings but also set up a better corporate image by taking much social responsibility (Chen, 2008; Ghisetti and Rennings, 2014; Lee and Kim, 2011). Numerous existing literatures show that green innovation could improve performances of enterprises. Findings of Singh et al. (2016) strongly validate the influence of innovation drivers and green innovation with 61% variance explained for business performance. Bresciani and Ferraris (2016) illustrated that innovation admits a positive impact on business performance. Verma (2012) found that Indian banking industry was increasingly focusing on corporate social responsibility, where the most important part is green loan. Meanwhile, there are also some works suggesting that green innovation does not improve corporate performance (Aguilera-Caracuel and Ortiz-de-Mandojana, 2013; Jabbour et al., 2015). The current paper claims that innovation supported by green loans can bring additional benefits to enterprises and return favorable business performances.

Even though there are numbers of literatures on green innovation, most of them concentrate on the influences by banking development and financial performance. Few literatures care for the effects of loaning scale on the result of green innovation. Government subsidy as an intervention usually belongs to policy research. However, actually, there is no result claiming that government subsidy is an effective intervention in environmental protection. Meanwhile, few literatures consider cooperation among the government, banks and enterprises in green innovation. Moreover, literatures regarding enterprises as primary objects and considering the profits and risks in the processes of green innovation are rather rare. Thus, motivated by the above argument on the existing literatures, we claim that these questions are addressed in the current paper. Firstly, we establish models capturing the cooperation among enterprise, bank and government. The objective of the enterprise is to achieve an enhancement of profit with innovation. The bank needs to evaluate the effect of innovation and make a decision on the approval of green loan. The government would like to improve the environmental quality by providing subsidy. Secondly, we study the effect of the loaning scale on the green innovation. There should be a potential linkage between the loaning scale and the result of green innovation. We find such a linkage in this paper. Thirdly, we address the effect of government subsidy on the green innovation through rigorously proving the effectiveness of such an intervention in environmental protection and sustainable development.

In this paper, we reach our desired results through constructing game theory models and carrying out analysis, which is different from traditional approaches such as empirical methods. Game models have been widely used to discuss the government-enterprise decision making on environmental protection. Schmalensee (2012) discussed the costs and benefits of various initiatives and alternative policies. In order to provide decision makers with a better tradeoff between profits and environmental effects, Huang et al. (2016) investigated the influences of product design, supplier selections, transportation modes and pricing strategies on profits and greenhouse gas emissions by game models. Tian et al. (2014) analyzed the interest relation among the government, enterprises and consumers by dynamic game models, which interprets that subsidy is beneficial to the diffusion of green supply chain management. Kuang (2016) studied the subsidy system construction of Chinese new energies by associating game theory with logic optimization. Hafezalkotob et al. (2016) considered the influences of environmental policies on green production and supply chains through the multi-level game theory approach. He pointed that the government could reduce negative effects of supply chains on the environment and encouraged green productions via taxation and subsidies. The current paper proposes series of game models for the decisions of enterprise, bank and government. The enterprise desires to realize an enhancement of its profit by applying for loan from the bank. The bank would like to make the production of the enterprise more green after technique innovation with the loan. The key in the game between the enterprise and the bank is the loaning scale. On the other hand, the key problem for the government is to determine whether the subsidy provided by it is effective to improve environmental quality and support sustainable development.

The rest of the paper is organized as follows. In Section 2, series of primary game models are established, including the case depicting classical production, the case with green loan for green innovation and the case with subsidy from the government after successful innovation. In Section 3, according to the models constructed in Section 2, we derive the condition on interest rate of the green loan driving the enterprise applying for the loan to green innovation. The loaning scales are considered. In Section 4, by the introduction of government subsidy, we demonstrate the effectiveness of government intervention in environmental protection and sustainable development. Conclusion and discussion are presented in 5 Conclusions, 6 Discussion.

Section snippets

Baseline models

We consider a representative enterprise in the market. We establish models under free competition and assume that the industry heavily depends on energy consumption. We fix other inputs since we focus our attention on the energy input and the productive effects on the environment. Without applying for green loan, the enterprise produces obeying the classical mode. The output Q of the enterprise with energy input M is given asQ=κθM,where θ is the energy efficiency depicting percent conversion of

Loaning scale and interest rate

As an interpretation at the end of the last section, the determination of loaning scale is the core problem in green loan. If a green loan with impertinent loaning scale was approved, its expected effect might be influenced. Since the precondition of green innovation is the intention that enterprise accepts green loan provided by the bank, interest rate is another key problem in green loan. Usually, low interest rate is preferred by the enterprise but averse by the bank. There exists an

Government subsidy

The government supports green production through effective intervention means. It provides subsidy for the enterprise who makes a decision to carry out green innovation. However, the enterprise would invest the subsidy into the technique innovation process, which leads to a larger energy input. The enhancement of input would cause the enhancement of energy emission and on the contrary reduce the environmental effect of green innovation. We turn towards a problem whether the government subsidy

Conclusions

In this paper, we investigate the effects of green loans and government subsidies on promoting green innovation of enterprises through series of game models. A representative enterprise in free competition market is selected as the considerable object, who is supposed to pursue the maximum expected profit and concern on the innovation risk. After working on the constructed models, we conclude that the green loaning scale plays the primary role in the green loan for green innovation. The

Discussion

Environmental protection and sustainable development are acknowledged around the world. Green production and green innovation are encouraged. Enterprises, banks and governments are primary objects in this circumstance. Enterprise carry out productions and innovations. Banks provide funds. Governments guide the behaviors of enterprises through effective interventions. The current paper models the cooperation among enterprises, banks and governments, and achieves some useful results for practice,

Zhehao Huang, Member in Guangzhou International Institute of Finance. Working on financial engineering.

References (43)

  • Z. Li et al.

    Green loan and subsidy for promoting clean production innovation

    J. Clean. Prod.

    (2018)
  • I. Monasterolo et al.

    The EIRIN flow-of-funds behavioural model of green fiscal policies and green sovereign bonds

    Ecol. Econ.

    (2018)
  • R. Nanda et al.

    Did bank distress stifle innovation during the great depression?

    J. Financ. Econ.

    (2014)
  • S.R. Paramati et al.

    The effect of foreign direct investment and stock market growth on clean energy use across a panel of emerging market economies

    Energy Econ.

    (2016)
  • R. Schmalensee

    "Green Growth" to sound policies: An overview

    Energy Econ.

    (2012)
  • Y. Tian et al.

    A system dynamics model based on evolutionary game theory for green supply chain management diffusion among Chinese manufacturers

    J. Clean. Prod.

    (2014)
  • C. Wang et al.

    Green insurance subsidy for promoting clean production innovation

    J. Clean. Prod.

    (2017)
  • F. Xin et al.

    Does credit market impede innovation? Based on the banking structure analysis

    Int. Rev. Econ. Financ.

    (2017)
  • D. Acemoglu et al.

    Transition to clean technology

    J. Polit. Econ.

    (2016)
  • J. Aguilera-Caracuel et al.

    Green innovation and financial performance: an institutional approach

    Organ. Environ.

    (2013)
  • P. Berrone et al.

    Necessity as the mother of ‘green’ inventions: Institutional pressures and environmental innovations

    Strateg. Manag. J.

    (2013)
  • Cited by (322)

    View all citing articles on Scopus

    Zhehao Huang, Member in Guangzhou International Institute of Finance. Working on financial engineering.

    Gaoke Liao, Member in College of Finance and Statistics, Hunan University. Working on financial statistics and green finance.

    Zhenghui Li, Member in Guangzhou International Institute of Finance, Working on risk management and green finance.

    This article belongs to the Special section on Social and Economic Effect of Green Technologies and Policies in the Transition Economies of Northeast Asia.

    ☆☆

    The work was supported by Humanities and Social Sciences Fund of Ministry of Education of China (No. 17YJAZH049), National Natural Science Foundation (No. 11701115) and China Postdoctoral Science Foundation (No. 2017M610515).

    View full text