Linking Green Complexity to Financial Development: Cross Country, Regional and Firm Level Analyses

Abstract

Productive capabilities and its role on economic growth and development have attracted a lot of attention among researchers and policy makers since the introduction of the concept of “economic complexity index”. Another dimension of economic complexity which is “green complexity”, has recently gained increasing attention as climate change challenges intensify and countries around the world lay out ambitious agenda for moving towards a green economy. Building on economic complexity literature, Mealy and Teytelboym (2020) introduced a novel concept “green complexity” to measure the green capabilities of countries. Acknowledging that green economic complexity is the amount of knowledge materialized in a country’s green productive structure, financial development could be an important determinant of green complexity and play a key role at enhancing competitiveness of green products in export markets. In this regard, the main motivation of this study is to analyse how financial development affects green production capabilities and green complexity at cross-country level and province level for Turkey and how financial vulnerability affects green complexity of Turkish firms. Results point out a positive impact of financial development on green complexity for developing countries as well as for Turkish provinces. A rise in financial vulnerability adversely impacts green complexity of Turkish firms. Overall, the results of the study suggest that financial development should be one of the priorities of policy makers to enhance green production capabilities of economic units. In addition, financial soundness is critical for firms to channel their resources to innovation and R&D for enhancing product sophistication.