SMEs respond to climate change: Evidence from developing countries.

Abstract

Given the concerns stemming from climate change, it is important to investigate whether SMEs could become innovative (and thereby invest in technologies mitigating climate change) because of heightened climate change risk. This study explores the impact of climate change on SMEs’ innovation from a resource-based view (RBV) standpoint. Using the generalized method of moments (GMM) estimation of panel data for 443 SMEs from 14 developing countries during the period 2007–2016, we found that climate change has a significant positive impact on SMEs’ innovation performance. In economic terms, climate change of one standard deviation variation resulted in a 6.6% increase in innovation investment. Interesting results emerged when the sample was divided into firms with high and low growth, high and low profit, and high and low slack resources, and industries with high and low vulnerability. The results show that SMEs’ innovation response to climate change may vary substantially across firms and industries. In high-growth, high-slack-resources firms, and in highly profitable and non-vulnerable industries, SMEs’ innovation responds positively to climate change. Our study contributes to the SME and climate change literature by being the first to examine the impact of climate change on SMEs’ innovation. Managerial and policy implications are discussed.