Quantity or quality? The impact of financial geo-density on firms' green innovation

Green innovation is an essential support for environmentally sustainable development. However, little attention has been given to the impact of financial expansion on green innovation in the existing literature, and there is a lack of studies based on the perspective of the financial geographical supply structure. This study uses latitude and longitude information to construct firm-level financial geo-density data in China. It examines the impact of financial geo-density on a firm's green innovation and mechanisms. The results reveal that as financial geo-density increases, green innovation quantity increases, but green innovation quality decreases. The findings of the mechanism test indicate that an increase in financial geo-density decreases the cost of financing and boosts bank competition in the vicinity of the firm, hence resulting in a rise in the firms' green innovation quantity. Nevertheless, the degree of bank competition increased by financial geo-density increase negatively affects firms' green innovation quality. Heterogeneity analysis shows that financial geo-density has a more significant positive impact on a firm's green innovation quantity in high environmental regulation areas and high-pollution industries. Firms with low innovation capabilities are the main group responsible for the decline in green innovation quality. For firms located in low environmental regulation areas and medium- to light-pollution industries, financial geo-density has a more significant inhibition effect on green innovation quality. Further tests have shown that the extent to which financial geo-density enhances a firm's green innovation quantity diminishes as market segmentation increases. A new concept of financial development policies based on green development and innovation is presented in this paper for developing economies.