Climate finance, institutions

and innovation systems

in Sub-Saharan Africa
FRANK ADU, Ph.D.*
ROSHELLE RAMFOL, Associate Professor*

Article**
JEL: H23, H30, H50, I30, N17, O10
https://doi.org/10.3326/pse.49.2.6

*
The authors would like to thank two anonymous reviewers for their valuable comments.
**
 eceived: October 9, 2024
R
Accepted: February 20, 2025

Frank ADU
College of Accounting Sciences, University of South Africa P.O. Box 392, Pretoria, 0001, South Africa
e-mail: [email protected]
ORCiD: 0000-0003-0072-882X

Roshelle RAMFOL
College of Accounting Sciences, University of South Africa P.O. Box 392, Pretoria, 0001, South Africa
e-mail: [email protected]
ORCiD: 0000-0002-4682-2558

 his is an Open Access article distributed under a Creative Commons Attribution-NonCommercial 4.0 International
T
License which permits non commercial use and redistribution, as long as you give appropriate credit, provide
a link to the license, and indicate if changes were made.
310 Abstract
To enhance climate finance’s effectiveness in Sub-Saharan Africa (SSA) and explore
how it can be deployed to boost innovation, this study has explored the effect of cli-
mate finance combined with institutional quality on innovation while emphasizing the
multidimensional measurement approach to innovation. Using data from twenty-three
(23) countries in SSA spanning the period 2011 to 2022 and the system Generalized
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Method of Moment (GMM) estimator, the results from the study show a negative and
significant effect of climate finance on innovation in SSA. Also, we found that institu-
tional quality has a positive and significant effect on innovation. Further, we realized
from the conditional effect results that when the level of institutions in SSA is highly
effective, the positive effect of climate finance on innovation is magnified. Given these
findings, this study recommends that policies to improve climate finance in SSA should
be pursued simultaneously with policies promoting strong institutions.
SYSTEMS IN SUB-SAHARAN AFRICA
FINANCE, INSTITUTIONS AND INNOVATION
FRANK ADU, ROSHELLE RAMFOL: CLIMATE

Keywords: climate finance, innovation, institutions, climate mitigation, climate adap-

tation, Sub-Saharan Africa

1 INTRODUCTION
Climate change continues to pose significant obstacles to achieving sustainable
development goals, with Sub-Saharan Africa disproportionately suffering the conse-
quences despite contributing less than 4% to global greenhouse gas emissions.
According to the 2018 World Bank report, climate-related disasters, including rising
sea levels, droughts, floods, and episodes of extreme heat, are expected to push more
than 100 million people into poverty, with Sub-Saharan Africa and South Asia being
the most brutally hit (Mouleye et al., 2019). These challenges are further intensified
by the inability of many African countries to mobilise the necessary financial
resources to reduce emissions and effectively build their resilience to climate change
(Doku et al., 2021a, 2021b; Mekonnen et al., 2021; Mekonnen and Hoekstra, 2014).
To address these effects, some developed countries have pledged to mobilise funds
from various sources in the form of Official Development Assistance (ODA), clas-
sified as climate finance, to support less developed nations to mitigate and adapt to
climate change. The commitment has sparked discussions on the impact of climate
finance on various development outcomes.

As Trutnevyte et al. (2019) and Shi, Wang and Wang (2018) noted, the pursuit of
new and efficient solutions to climate challenges is essential to mitigate the risk of
environmental devastation. As a result, innovation is seen as a sure dynamic capa-
bility that nations can deploy to achieve sustainable development while improving
environmental quality through reduced carbon emissions (Apostu et al., 2023).
In 2015, the Paris Agreement strongly affirmed the critical role of innovation,
emphasising that “accelerating, encouraging, and enabling innovation is essential
for an effective, long-term global response to climate change.” Indeed, current lit-
erature supports the notion that innovation is a critical driver of sustained economic
growth (Anttila and Jussila, 2019; Maradana et al., 2017; Pradhan et al., 2019).
Advanced technologies create opportunities to transform products and services
and promote sustainable practices (Lopes de Sousa Jabbour, 2018). Innovation is
essential for achieving green economy goals, particularly zero pollution, while foster-
ing value creation, employment, and national development (Gerguri and Ramadani,
311
2010; López and Figueroa, 2016; Pradhan et al., 2019; Silvestre and Ţîrcă, 2019).

Current literature (Lee et al., 2022; Ryan Hogarth, 2012) has theoretically hinted
at climate finance’s potential impact as a crucial mechanism for facilitating inno-

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vation. It is, therefore, unsurprising that some scholarly interest has been expressed
in explanations of how climate finance can influence innovation (Ryan Hogarth,
2012; Lee and Shin, 2022; Pradhan et al., 2023).

Despite these interests, the empirical findings on the relationship have been mixed
and remarkably inconsistent. Moreover, Sharma, Sousa and Woodward (2022) and
Ryan Hogarth (2012) have indicated that the effect of climate finance on innovation
is highly context dependent. Accordingly, researchers must account for these rele-

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FINANCE, INSTITUTIONS AND INNOVATION
FRANK ADU, ROSHELLE RAMFOL: CLIMATE
vant boundary conditions when exploring this vital relationship. This notwithstand-
ing, the mechanisms through which climate finance impacts on innovation remain
poorly understood in the literature, particularly those regarding SSA.

Our literature scan reveals that one critical and yet-to-be-studied mediating factor
in the literature is institutional quality. A closer examination of institutional
dynamics can offer valuable insights into how climate finance fosters innovation
across different contexts. The quality of institutions may be pivotal in shaping the
climate finance-innovation nexus. This is because institutions must establish regu-
latory and policy frameworks that foster an environment conducive to innovation
(Porter and Linde, 1995). Secondly, they are pivotal in safeguarding intellectual
property rights (IPR), essential for stimulating innovation (Sharma, Sousa and
Woodward, 2022). Institutions also contribute by reducing transaction costs asso-
ciated with information asymmetry and innovation (Williamson, 1985). Further-
more, they can strengthen the effect of climate finance on innovation by providing
financial support and research-and-development (R&D) incentives (Bérubé and
Mohnen, 2009; David, Hall and Toole, 2000). Additionally, institutions play a key
role in cultivating a culture of innovation by creating environments that value and
support creative endeavours (Grindle, 2004). Finally, effective institutions ensure
transparency and accountability throughout innovation (North, 1990).

The above assertions establish a foundation for an empirical inquiry. This study
addresses a key policy question: Is climate finance directed towards SSA countries
effectively fostering innovation on the continent? Furthermore, does the quality of
institutions in SSA mediate the relationship between climate finance and innova-
tion on the continent? Several important stylised facts, policy concerns, and gaps
in the empirical literature have driven the undertaking of this study. The second
question is fundamental because climate change is closely tied to institutional
frameworks and ideologies (Hulme, 2009), which is pivotal in shaping how cli-
mate finance is utilised. Institutional factors not only directly influence innovation
but also have the potential to affect innovation indirectly through their impact on
the allocation and effectiveness of climate finance.
312 The current study departs from the findings of the reviewed literature in many
ways. First, it seeks to investigate the direct and indirect effects of climate finance
and institutional quality factors on innovation in SSA. Very little is known about
the effects of climate finance on improving innovation in Africa. This study makes
a bold claim, asserting that the relationship among climate finance, institutional
quality and innovation has yet to be explored in empirical economic literature.
49 (2) 309-337 (2025)
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The most closely related research is by Pradhan et al. (2023), which examined the
relationship between overall foreign aid, institutions, and innovation in middle-
income countries. However, our study diverges by focusing specifically on bilat-
eral and multilateral climate finance in Sub-Saharan Africa, as reported by the
Organization for Economic Co-operation and Development (OECD), rather than
ODA. Additionally, we use the innovation output sub-index from the Global Inno-
vation Index (GII) to measure innovation outcomes, a metric not considered in
Pradhan’s study. The Innovation Output Index effectively captures critical drivers
SYSTEMS IN SUB-SAHARAN AFRICA
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FRANK ADU, ROSHELLE RAMFOL: CLIMATE

of innovation, including knowledge and technology outputs (such as knowledge

creation, impact, and diffusion) and creative outputs (intangible assets, creative
goods, services, and online creativity) (Osei, 2024).

We enhance the measurement of institutional quality using principal component

analysis (PCA) on the World Bank’s Worldwide Governance Indicators (WGI),
providing a more precise measure (Tashtamirov, 2023). We employ the system
GMM estimator, which robustly addresses endogeneity, lag differences, and sim-
ultaneity rather than error correction and ARDL models, improving on studies by
Pradhan et al. (2023) and Nadeem et al. (2020).

Further, Gilder and Rumble (2020) have argued that climate finance is often more
donor-centric than recipient-focused; enhancing the effectiveness of climate fund-
ing in African countries requires a shared understanding between donor and recip-
ient nations. This study will contribute to that understanding through the examina-
tion of the interactions among climate finance, institutions, and innovation in Sub-
Saharan Africa. It provides insights that will help improve collaboration and policy
alignment, highlighting how effective strategies can bolster institutional development,
innovation, and climate finance. These insights aim to shape a more sustainable eco-
nomic development trajectory for the region.

This paper follows the following structure: section 2 reviews the literature on the
interrelationships of climate finance, innovation, and institutional quality, high-
lighting their interconnections and formulating the study’s hypotheses. Section 3
details the data, variables, and econometric model used to test these hypotheses.
Section 4 presents the empirical findings and interpretations. The fifth and last
sections conclude the study by summarising our contributions, discussing policy
implications for policymakers and practitioners, acknowledging the limitations,
and suggesting directions for future research.
2 STYLIZED FACTS ABOUT CLIMATE FINANCE IN AFRICA
The political nature of climate finance has kept its definition subject to ongoing
313
debate, with no universally accepted standard. The United Nations Framework
Convention on Climate Change (UNFCCC) offers one of the most widely accepted
descriptions, defining climate finance as “local, national, or transnational financ-
ing – sourced from public, private, and alternative funds – intended to support

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mitigation and adaptation efforts aimed at addressing climate change.”1 Gebreye-
sus (2017) states that one way to classify climate finance is as aid, but as an addi-
tion to the “0.7%” ODA target. In Africa, climate finance predominantly takes the
form of Official Development Assistance (ODA) due to the continent’s limited
financial capacity and underdeveloped markets, which restrict access to private
sector climate funds.

Of Africa’s total climate finance needs, adaptation constitutes only 24%, while

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FINANCE, INSTITUTIONS AND INNOVATION
FRANK ADU, ROSHELLE RAMFOL: CLIMATE
mitigation dominates, accounting for 66% of the required funding for 2020-2030.
Africa is highly dependent on external public climate finance (86%)2, which is
disbursed as ODA. Unfortunately, the flow of climate finance from external
sources in Africa has been low and does not meet the required amount needed for
mitigation and adaptation. The Climate Policy Initiative estimates that between
2020 and 2030, African countries will need about 2.8 trillion, or 2,800 billion
United States dollars annually, to implement all the Nationally Determined Con-
tributions (NDCs). This is much more than the average of USD 30 billion received
annually, which makes up only 12% of the required funding.3 According to
Tamasiga et al. (2023), weak institutional structures are headlined by the absence
of any specialist climate finance units, poor coordination between donors and gov-
ernment institutions, and lax legal and regulatory systems. Moreover, unstable
and unpredictable climate finance flows compound the challenges, with climate
funds flows fluctuating depending on voluntary donor contributions.

Moreover, according to Ahenkan (2020), the allocation of adaptation funds has

suffered from poor donor coordination. Some donors continue to bypass multilat-
erally agreed-upon principles in their disbursement, complicating donor efforts to
plan and implement long-term climate projects that require sustained support.

Another problem accounting for the shortfall in climate finance is the failure of
developed countries to meet the 2020 $100 billion climate finance target. This has
eroded trust and undermined confidence in developed countries’ efforts against
climate change.

1
Refer to: https://unfccc.int/topics/introduction-to-climate-finance
2
See: https://www.weforum.org/agenda/2023/12/cop28-bridging-the-climate-finance-gap-in-africa-and-
beyond/
3
See: https://www.weforum.org/agenda/2023/12/cop28-bridging-the-climate-finance-gap-in-africa-and-
beyond/
314 Lastly, according to Musah-Surugu et al. (2018), climate finance seems fragmented.
The various funds have different priorities and eligibility criteria, making it difficult
for African countries to access them. This fragmentation reflects inefficiencies and
deeper political divisions in climate finance (Biermann et al., 2009).

Figure 1 shows that aside from Burkina Faso, Guinea and Cameroon, all the SSA
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countries sampled in this study have experienced unchanging or decreasing cli-

mate finance.

Figure 1
Trend
450
analysis of climate finance among SSA countries
400
350
300
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FRANK ADU, ROSHELLE RAMFOL: CLIMATE

1,000 US $

250
200
150
100
50
0

Zambia
Tanzania
Togo
Togo
Uganda
Zambia
Guinea
Guinea
Kenya

Mali
Mauritius
Mauritius
Namibia

Rwanda
Senegal
Senegal
South Africa
Angola
Angola
Benin
Botswana
Botswana
Burkina Faso
Burundi
Burundi
Cameroon
Ethiopia
Ethiopia
Ghana

Switzerland
Switzerland
Madagascar
Madagascar

Niger
Niger

Adaptation finance Mitigation finance Total climate finance

Source: Authors.

3 THEORETICAL REVIEWS
3.1 THE LINK BETWEEN CLIMATE FINANCE AND INNOVATION
We outline two primary channels through which the impact of climate finance on
innovation can manifest. Firstly, it can work through investment in green tech-
nologies and sustainable practices. Climate change mitigation requires investment
in green technologies (e.g., PV installations) and sustainable practices with less
environmental impact (Lee et al., 2022; Ryan Hogarth, 2012). Interestingly, pro-
viding a conducive environment for green technologies will foster a culture of
innovation, encouraging firms and other businesses to innovate in areas like green
packaging, renewable energy, energy efficiency, and carbon capture technologies,
and finally, through funding for research and development. This channel is critical
where climate finance directly aids the development of new technologies and cli-
mate-related solutions. Providing financial support for research and development
will create the space for researchers and organisations to explore and develop
innovative approaches for climate resilience.
3.2 L
 INK BETWEEN INSTITUTIONAL QUALITY, CLIMATE FINANCE
AND INNOVATION
315
The link between institutional quality, climate finance and innovation can be
understood through two broad channels. First, climate finance may be enhanced
when some clear policies and measures align with climate goals and commit-
ments. Institutions are crucial in shaping emission levels by implementing envi-

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ronmental regulation policies. Therefore, weak institutions often lead to poor
regulations and higher emissions, whereas strong institutions facilitate eco-
friendly practices and ensure lower emissions through rigorous regulatory frame-
works. This is fundamentally the “Porter hypothesis” basis, further illustrating the
link between institutions and the environment. This hypothesis suggests that strin-
gent regulatory policies stimulate innovation in technologies that reduce pollu-
tion. Such innovations can provide a competitive edge, ultimately balancing envi-
ronmental costs and enhancing economic efficiency (Zhang and Baranzini, 2004;

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Alavuotunki, Haapanen and Pirttilä, 2019).

Concerning the second channel, strong institutions can effectively enforce the
rules and regulations that protect intellectual property rights, which are central to
innovation development. According to Sharma, Sousa and Woodward (2022),
institutions play a crucial role in enhancing innovation because they lower trans-
action costs arising from information asymmetry, bargaining and coordination and
enforcement of contracts. For instance, in an economy where the authorities use
their legal discretion to reward cronies (North, 1993; Rodrik, 2000), economic
inefficiency will result, impeding innovation development. Further, studies have
shown that strong institutions can stimulate innovation performance by providing
direct R&D subsidies, tax incentives and knowledge transfer (Bérubé and Moh-
nen, 2009; David, Hall and Toole, 2000). Institutions thus mediate innovation by
directing economic resources to productive sectors that will yield beneficial eco-
nomic outcomes (Sindzingre, 2005). As Sen (1981) opined, effective institutions
play a critical role in fair resource allocation and access, which is crucial for inno-
vation development.

In conclusion, good governance, marked by robust institutional frameworks, is

essential for effective climate finance implementation and equitable resource allo-
cation. This necessitates institutions that establish fair laws, administer public ser-
vices efficiently, cultivate capable human capital, and ensure transparency and
public accountability (Grindle, 2004).

3.3 RELEVANT EMPIRICAL REVIEWS

A considerable number of studies have argued that climate finance promotes eco-
nomic growth and environmental sustainability through better capital allocation
(Han and Jun, 2023; Lee et al., 2022; Mahat et al., 2019; Romano et al., 2017;
Steckel et al., 2017; Tol, 2009). Their arguments emanate from climate finance serv-
ing as a new form of financial buffer that can cushion firms to adopt green technol-
ogy in their operations to ensure sustained growth and reduce carbon emissions.
316 Despite the beneficial influence of climate finance on environmental sustainability
and growth, recent literature has highlighted the possible influence of climate
finance on innovation. This is because the success of every economy depends
mainly on the ability of the productive and distribution sectors to innovate. Not-
withstanding, studies in this domain of research have produced remarkably incon-
sistent findings. For example, Pradhan et al. (2023), Warren (2020), Czarnitzki
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and Hottenrott (2011) and Dakhli and De Clercq (2004) revealed a restrictive
effect of climate finance on innovation. Studies such as those by Ryan Hogarth
(2012), Bannert (2020), Gorodnichenko and Schnitzer (2013), and Ryan Hogarth
(2012) have shown that climate finance has a beneficial effect on innovation.
Interestingly, the study by Blind (2012) found no significant relationship between
the two indicators in developing economies and suggested that the impact of cli-
mate finance on innovation depends on the structures and fundamentals of an
economy and called for better institutional regulation.
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Given this call, past studies such as Osei (2024), Sharma, Sousa and Woodward
(2022) and Nadeem et al. (2020) investigated the effect of institutional quality on
innovation and confirmed that better institutions promote innovation by enforcing
rules and regulations that protect intellectual property rights. Also, the authors
contended that effective institutions foster policies that can direct climate funds
into the productive sectors of the economy to yield positive outcomes on innova-
tion. While the influence of institutions on innovation has been examined at vari-
ous levels (Pradhan et al., 2023; Rodríguez-Pose and Zhang, 2020; Oluwatobi et
al., 2016), there remains a notable vacuum in the literature regarding the media-
tion effect of institutional quality on climate finance-innovation nexus. A critical
examination of the literature suggests that only Nadeem et al. (2020) have inves-
tigated the mediation effect of institutional quality in the relationship between the
foreign aid-innovation nexus. Thus, the theoretical specification on how institu-
tional quality can be adopted to bridge the climate finance-innovation gap lacks
rigorous empirical investigation in the literature, especially that relating to SSA.
An important implication of this gap in the literature is that knowledge is lacking
on how this relationship works in less-developed economies. Specifically, how
institutional qualities can direct climate funds to the productive sectors of the
economy to enhance innovation remains unexplored in SSA. Therefore, the cur-
rent study aims to fill this gap by providing compelling evidence on the African
perspective regarding the impact of climate finance on innovation by considering
the role that institutional quality plays.

This gap is significant given that SSA economies top the chart as the major recipi-
ents of climate finance. Therefore, understanding how this relationship works in the
African context is essential to guide policies and laws in the climate finance space.
4 METHODOLOGY
To probe into how climate finance can be adopted to enhance innovation in SSA
317
mediated by institutional quality, we grouped this section into three main sub-
sections: data and variable description, empirical model specification, and estima-
tion methods employed.

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4.1 DATA AND VARIABLE DESCRIPTION
This study primarily focused on balanced panel data of twenty-three countries in
SSA from 2011 to 2022. It should be noted that the sample frame of this study was
chosen due to the easy accessibility and availability of data on the main variable of
interest. Also, we sample the twenty-three countries in SSA for this empirical inves-
tigation because these countries have complete data for the main constructs. Data
for this study were sourced from three different databases. Specifically, innovation

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and climate finance data were extracted from the World Intellectual Property Organ-
ization (WIPO) and the OECD databases, respectively. Moreover, the other varia-
bles such as institutional quality index, foreign direct investment, human capital,
gross domestic product per capita, digital infrastructure index, inflation and govern-
ment expenditure were sourced from World Development Indicators (WDI).

This study measured innovation as the innovation output sub-index of the GII as the
dependent variable because its focus is to assess the determinants of innovation in
SSA, primarily focusing on climate finance and institutional quality. It should be
noted that all the control variables were adopted from past studies such as Osei
(2024), Pradhan et al. (2023), and Sharma, Sousa and Woodward (2023). We report
the abridged version of the data sources and how they were measured in table 1.

Table 1
Variable description
Variable Notation Measurement Source
Dependent variable
Innovation INNOV Innovation output sub-index (score 0–100) WIPO
Independent variable
Climate-related development finance Commitment
Climate finance CF OECD
(Current USD thousand)
Mediating variable
It is computed as an average of Kaufmann’s six
indicators of institutional quality (Regulatory
Institutional
IQ quality, government effectiveness, rule of law, WDI
quality index
control of corruption, voice and accountability,
political stability, and lack of violence)
Control variables
Human capital HC School enrolment, tertiary (% gross) WDI
GDP per capita GDPPC GDP per capita (constant 2015 US$) WDI
Government General government final consumption
GE WDI
expenditure expenditure (% of GDP)
318 Variable Notation Measurement
Mobile cellular subscriptions (per 100 people),
Source

Digital Individuals using the Internet (% of the population),

DIFRA WDI
infrastructure Fixed telephone subscriptions (per 100 people) and
Fixed broadband subscriptions (per 100 people)
Financial
Domestic credit to private sector (% of GDP) WDI
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development
Note: WIPO, OECD and WDI represent the World Intellectual Property Organization,
Organization for Economic Co-operation and Development and World Governance Indicators,
respectively.
Source: Authors.

4.2 THEORETICAL AND EMPIRICAL MODEL

This study modifies the innovation model proposed by Howitt and Aghion in 1998
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to assess the effect of climate finance on innovation in SSA. According to Howitt

and Aghion, innovation is determined by knowledge acquisition, human capital
development and the financial resources a country controls or possesses. These
financial resources include donations, aid, total revenue mobilisation, etc.
(Anselmi, Lagarde and Hanson, 2015). Interestingly, this study conceptualizes the
financial resources that developing nations receive to mitigate climate emissions
as climate finance. According to Romano et al. (2017), climate finance enhances
the financial capacity of developing nations. It enables them to develop and deploy
new technologies and innovative solutions essential for zero low-carbon emis-
sions. Therefore, this study specifies a linear function relationship between inno-
vation, climate finance and human capital development in equation 1 as follows:

(1)

where INNOV, CF and HC represent innovation, climate finance and human cap-
ital, respectively. Interestingly, following Osei (2024) and Sharma, Sousa and
Woodward (2022), who postulated that innovation in an economy is not depend-
ent solely on human capital and financial resources but on other economic and
institutional factors, we extended equation (1) to capture both economic and insti-
tutional factors such as institutional quality, GDP per capita, digital infrastructure
development, government expenditure and financial development. Hence, equa-
tion (1) was remodelled to incorporate these aforementioned factors and the inter-
action between institutional quality and climate finance as specified in equation
(2) below:

 (2)

The symbols IQ, CF*IQ, GDPPC, DIFRA, GE and FD indicate institutional qual-
ity, the interaction between climate finance and institutional quality, GDP per
capita, digital infrastructure development, government expenditures, and financial
development, respectively.
The estimate form of equation (2) is specified in equation (3) as:
319
 (3)

 (4)

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It must be noted that all the variables have already been explained. δ0, ln, , i and t
represent the constant term, natural logarithm, error term, and the number of coun-
tries and periods employed. The symbols μit, φi and represent idiosyncratic error
term, unobserved country-specific and time-specific effect so, ’s (1, 3…, 8) denote
the unknown parameters to be estimated.

4.3 ESTIMATION TECHNIQUE

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To assess the effect of the interaction between climate finance and institutional qual-
ity on innovations in SSA, we employed the two-step system generalized method of
moment (system-GMM) estimator proposed by Blundell and Bond (1998). We
adopted the two-step system-GMM in this study because it provides efficient and
unbiased results due to the additional moment conditions it uses. The system-GMM
estimator is applicable when the time period is smaller than cross-sectional units.
Furthermore, it employs the lags of the endogenous regressor as internal instruments
to mitigate any potential endogeneity issues that may develop because of the intro-
duction of the lagged dependent variable as part of the regressors. Therefore, the
system-GMM specification of equation (3) is expressed as follows:

lnINNOVit – lnINNOVit – 1 = σ0(lnINNOVit – 1 – lnINNOVit – 2)

+ ρ'(lnXit – lnXit – 1) + (ϵit – ϵt – 1)(5)

It is interesting to note that all the variables are already explained in the previous
equations. X represents a vector of variables captured in the previous equations. In
selecting an instrument for this study, we used the first difference of innovation as a
valid instrument. This is because Arellano and Bover (1995) suggested that using a
lagged level of the dependent variable as the instrument will be a poor instrument,
especially if the variable is close to a random walk. As a result, we applied
lnINNOVit – 2 – lnINNOVit – 3 as an appropriate instrument for lnINNOVit – 1 – lnINNOVit – 2.
Further, we applied Arellano and Bond (1991) and Hansen (1982) J tests to vali-
date the absence of second-order serial correlation and the validity of the instru-
ments, respectively. The null hypothesis of these tests reveals the absence of sec-
ond-order serial correlation and instrument validity. Therefore, we tested the null
hypothesis against the alternative hypothesis at 5% significance level. Interest-
ingly, we will fail to reject the null hypothesis and conclude that the estimates
have no problem if the probability values are higher than 5% significance level.
320 After estimating the interactive effect of climate finance and institutional quality,
we advanced the analyses. We computed the marginal effect of climate finance
and institutional quality for stimulating innovation by applying the partial differ-
entiation method proposed by Brambor, Clark and Golder (2006). Given equation
(3), the partial differentiation approach can be written as:
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 (6)

This approach allows us to ascertain the actual influence of climate finance on

innovation (θ1 + θ3 IQit) rather than interpreting the unconditional estimate of θ3 .

Further, this study has applied the Dumitrescu and Hurlin (2012) panel causality
test to inspect the causal interrelationship of climate finance, institutional quality
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and innovation in SSA. According to Khan et al. (2020), the Dumitrescu and Hur-
lin causality test is appropriate regardless of T > N or T < N and controls for cross-
sectional dependence and heterogeneity in the slope coefficients. The general
specification of this regression is given by:

(7)

It should be noted that Y and X are the stationary variables for country i and period
t. The coefficients are allowed to differ across countries but are assumed to be
time-independent. The lag order P is assumed to be the same for all the countries,
and the panels must be balanced.

From equation (6), we express the null and alternate hypothesis of this test as:

(8)

(9)

The non-rejection of the null hypothesis indicates the absence of any causal rela-
tionship among the variables.

Lastly, to ensure that the dataset employed passed preliminary checks like cross-
sectional dependency (CD) and no unit root, we used the cross-sectional depend-
ency test by Pesaran (2004) to inspect the cross-sectional dependency of the sam-
pled variables employed. Also, the Im, Pesaran and Shin (2003) and Pesaran
(2007) cross-sectionally augmented unit root tests were applied to ascertain the
stationary properties of the variables. Interestingly, the null hypothesis of all the
tests suggests no cross-sectional independence and unit root, whereas the alterna-
tive hypothesis proposes otherwise. Therefore, rejection of the null hypothesis
reveals that there is cross-country correlation and non-stationarity in the variables.
5 INTERPRETATION AND DISCUSSION OF RESULTS
This section presents and discusses the results, including descriptive statistics,
321
correlation among the variables employed, scatter plots, unit root results, and esti-
mated results.

5.1 DESCRIPTIVE STATISTICS

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This study reports the descriptive statistics of the sampled variables used in table 2.

Table 2
Descriptive statistics
Variable Obs. Mean Std. dev. Min. Max. Measurement unit
INNO 276 22.152 12.735 0.300 71.800 Index score 0-100
Current USD
CF 275 43.724 33.943 11.000 209.102
thousand

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FRANK ADU, ROSHELLE RAMFOL: CLIMATE
IQ 276 0.502 0.310 0.000 1.000 Index score 0-1
GDPPC 276 5,669.880 17,113.000 262.185 90,057.030 US$
HC 276 89.880 72.415 1.000 222.000 %
IFRAI 276 0.525 0.236 0.000 0.992 Index score 0-1
GE 276 15.233 5.837 6.697 36.143 %
FD 276 26.672 27.283 0.000 128.838 %
Note: INNOV, CF, IQ, GDPPC, HC, IFRAD, GE and FD indicate innovation, climate finance,
institutional quality index, gross domestic product per capita, human capital, infrastructure devel-
opment, government expenditure and financial development.
Source: Authors.

Using innovation output as a measure of innovation in this study, the study found
that the mean value of innovation in SSA is 22.15, indicating that, on average,
innovation in SSA is low. The difference between the minimum (0.30) and the
maximum (71.80) values of innovation reveals the extent of the disparity in inno-
vation among the sampled economies in SSA. This was established by the huge
standard deviation value of 12.74. Also, the study detected that climate finance
and institutional quality index have a mean value of 43,730 US dollars and a 0.502
score, respectively. Additionally, the results showed that the maximum value of
climate finance was 209,100 US dollars. With the control variables, we observed
that GDP per capita in SSA averaged 5669.887 US dollars. Further, human capi-
tal, infrastructure development index, government expenditure and financial
development were found to have mean values of 89.88%, 0.525 scores, 15.23%
and 26.67%. Furthermore, we found that the highest standard deviation among the
variables used for this analysis is GDP per capita. In conclusion, we realized that
all the variables do not deviate significantly from their respective means.
322 5.2 EXPLORATORY ANALYSIS OF PATTERNS AND RELATIONSHIPS OF
CLIMATE FINANCE, INSTITUTIONAL QUALITY AND INNOVATION IN SSA
This section of the study explores the patterns and relationships between innova-
tion, climate finance and institutional quality in SSA and the results are displayed
in figure 2.
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Figure 2
Scatter plot between climate finance, institutional quality and innovation in SSA
Climate finance and innovation Institutional quality and innovation
80 80

60 60
Innovation output

Innovation output
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40 40

20 20

0 0
0 0.2 0.4 0.6 0.8 1.0 0 0.2 0.4 0.6 0.8 1.0
Climate finance Institutional quality

Innovation outputs Fitted values Innovation outputs Fitted values

Source: Authors using STATA 15.1.

Figure 2 shows that climate finance and institutional quality demonstrate a modest
positive relationship with innovation in SSA. However, institutional quality exerts
a more pronounced positive impact on innovation than climate finance.

5.3 CORRELATION MATRIX

In addition to the scatter plots, we conducted a pairwise correlation test to validate
the linear association among climate finance, institutional quality, and innovation
in SSA. The results for this estimation are reported in table 3.

The results reported in table 3 indicate that except for government expenditure,
the rest of the variables used in this study have a positive association with innova-
tion in SSA. It is evident from the correlation coefficients that real GDP per capita
has a strong positive correlation with innovation. In contrast, the rest of the indica-
tors showed weak and moderate positive or negative correlations with innovation
in SSA. Since climate finance and institutional quality move in tandem with inno-
vation in SSA, we can conclude that enhancing these indicators in SSA will be
crucial for innovation development.
Table 3
Pairwise correlation among the variables
323
Variables (1) (2) (3) (4) (5) (6) (7) (8)
(1) INNO 1.000
(2) CF 0.031 1.000
(3) IQ 0.056 -0.036 1.000

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(4) GDPPC 0.696 0.082 -0.114 1.000
(5) HC 0.283 0.036 0.029 0.285 1.000
(6) IFRAI 0.022 0.023 -0.101 0.157 0.168 1.000
(7) GE -0.069 0.026 -0.060 -0.086 0.085 0.050 1.000
(8) FD 0.207 0.041 0.052 0.060 0.042 0.154 0.307 1.000
Source: Authors.

5.4 WEAKLY CROSS-SECTIONAL DEPENDENCY TEST

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Given that cross-country correlation can bias the estimates, we employed Pesa-
ran’s (2015) weak cross-sectional dependence test to inspect the cross-sectional
dependence among the variables. The results are reported in table 4.

Table 4
Weakly cross-sectional dependency test
Variable CD test Prob. value
INNOV 16.921 0.000
CF 9.680 0.000
IQ 2.348 0.019
GDPPC 21.806 0.000
HC 4.205 0.000
INFRAI 11.204 0.000
GE 2.088 0.037
FD 8.552 0.000
Note: The null hypothesis is that errors are weakly cross-sectionally dependent and the alterna-
tive hypothesis is that errors are strongly cross-sectionally dependent.
Source: Authors.

In table 4, none of the variables employed for this investigation exhibited cross-
sectional dependence. The null hypothesis of weakly cross-sectional dependence
is rejected at the 5% and 1% significance levels in all the variables tested. Since
there is strong cross-sectional dependence among the variables, we adopted a sta-
tionarity tests that accounts for this issues in the variables employed.
324 5.5 UNIT ROOT TEST
Table 5 reports the outcomes of Cross-Sectional Augmented Dickey Fuller and
Cross-Sectional Augmented IPS (CIPS) unit root test.

Table 5
Unit root test results
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CIPS test CADF test

Variable I(0) I(1) I(0) I(1)
INNOV -1.771 -2.692*** -1.012 -2.610***
CF -2.455** -6.279 *** -1.925* -2.273**
IQ -2.311** -3.044*** -1.954* -2.740***
GDPPC -1.545 -2.267** -2.081** -2.610***
HC -1.493 -2.938** -0.992 -2.610***
INFRAI -2.645*** -4.061*** -2.034** -2.475***
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GE -2.129* -3.533*** -1.450 -2.394***

FD -0.885 -2.180** -0.702 -2.611***
Note: ***, ** and * represent significant at 1%, 5% and 10% significance level. *, **, *** rep-
resent stationarity.
Source: Authors.

Given the results in table 5, we observed that innovation, real GDP per capita and
human capital and financial development were not stationary in the levels using
both CIPS and cross-sectional augmented Dickey Fuller (CADF) unit root tests.
Though institutional quality was stationary in the levels when we applied CIPS,
the results were also stationary when we employed the CADF unit root test. How-
ever, in both tests, all the variables were stationary at the first difference. After
confirming the stationarity properties of the variables, we continued to estimate
the unknown parameters.

5.6 E
 FFECT OF CLIMATE FINANCE AND INSTITUTIONAL QUALITY
ON INNOVATION IN SSA (SYSTEM-GMM RESULTS)
Here, we report the estimations obtained for assessing the impact of climate
finance and institutional quality on innovation in table 6. It should be noted that
we used the difference GMM estimation technique as a robustness check.

The results show that the previous level of innovation has a negative and signifi-
cant effect on the current innovation level in SSA. Improvement in the previous
innovation will lead to a fall in the current level of innovation in SSA by 0.31 to
0.18 scores, holding all the covariates unchanged. This finding indicates that inno-
vation in the context of SSA converged.
Table 6
Effect of climate finance and institutional quality on innovation in SSA
325
Coefficient
Variable
System-GMM Difference GMM
-0.306*** -0.184*
lnINNOVit – 1
(0.069) (0.108)

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-1.003*** -0.438**
lnCF
(0.376) (0.227)
3.039** 1.430*
IQ
(1.334) (0.775)
2.074** 0.974*
lnCF_IQ
(0.757) (0.580)
-0.980 1.413
lnGDPPC
(1.339) (4.054)
0.011** 0.003

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HC
(0.004) (0.005)
-1.874* -0.918
IFRAD
(1.084) (1.039)
-10.193** -1.441
lnGE
(4.511) (2.577)
5.289 0.847
lnFD
(3.899) (3.372)
3.039** 1.430*
Net/marginal effect
(1.334) (0.775)
19.887
Constant
(12.593)
AR(2) test statistic -0.670 -0.880
AR(2) P-value 0.505 0.377
Hansen test statistic 4.940 5.890
Hansen P-value 0.895 0.751
No. groups 22 22
No. instruments 20 20
Note: ***, ** and * represent significant at 1%, 5% and 10% significance level.
Source: Authors.

Concerning climate finance, we found a negative and statistically significant effect

on innovation in SSA. The negative coefficients, which are significant at 5% and
1% levels, indicating that climate finance diminishes innovation. The coefficient
suggests that a 1% increase in climate finance will cause innovation to fall by 1.00
and 0.44, respectively. These results imply that international donor communities
do not have innovation development in SSA as part of their policy agenda. This is
because the climate finance received in SSA comes from international donor com-
munities and governments in developed economies. This is particularly concern-
ing, as innovation must be part of the strategies for combating climate change.
If climate finance directed towards Africa fails to prioritize innovation, it poses a
significant challenge to the continent’s ability to develop sustainable solutions,
leaving its prospects uncertain. The lack of emphasis on innovation could be
attributed to minimal or non-existent allocation of climate finance to research and
326 development. Consequently, there may be insufficient investment in adaptation
and mitigation efforts related to innovation and technology development. How-
ever, Warren (2020) contended that these donor communities and governments
prioritise sectors like energy and transport systems with rewarding outcomes
rather than investing in disruptive innovations. This finding aligns with the empir-
ical evidence by Ryan Hogarth (2012), who highlighted the negative effect of
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climate finance on innovation in developing economies.

It was also revealed in table 6 that institutional quality has a positive and signifi-
cant effect on innovation in SSA. The result suggests that improvement in institu-
tions in SSA will enhance innovation by scores of 3.04 and 1.43. This finding
implies that an economy with solid institutions can effectively enforce the rules
and regulations that protect intellectual property rights and encourage fair competi-
tion, which are central to innovation. This result aligns with the evidence provided
SYSTEMS IN SUB-SAHARAN AFRICA
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by Sharma, Sousa and Woodward (2022), Anselmi, Lagarde and Hanson (2015) and
Simón-Moya, Revuelto-Taboada and Guerrero (2014), indicating that in countries
with more robust political stability, the rule of law and integrity of contracts con-
sistently perform better across a range of economic indicators including innova-
tion. However, the finding contradicts the study by Rodríguez-Pose and Zhang
(2020), which argued that innovation tends to be stifled in an economy where
acquiring patents and trademarks for innovation is bureaucratic.

Given that institutional quality enhances innovation, we further explored its medi-
ating role in the relationship between climate finance and innovation. As reported
in table 6, the interaction term results indicate that robust institutional frameworks
are essential for climate finance to positively and significantly impact innovation
in SSA. The coefficient of the interaction term reveals that an increase in climate
finance can boost innovation scores by 2.07 and 0.97 points when institutions in
SSA are effective. This finding is not unexpected, as strong institutions can direct
climate finance towards projects with the highest innovation potential. Conse-
quently, effective institutions act as a crucial conduit for enhancing innovation,
particularly in SSA, where innovative capacities are currently underdeveloped.

Turning to the control variables, the study found that real GDP per capita nega-
tively and insignificantly affects innovation in the system GMM estimation. In the
difference GMM method, the effect was positive but not statistically significant.
Specifically, a 1% increase in real GDP per capita is associated with a 1.41-point
increase in innovation. This positive relationship aligns with the findings of
Saldanha et al. (2021) and Osei (2024). Additionally, human capital was shown to
positively and statistically significantly impact innovation. This suggests that
human capital accumulation, particularly through tertiary education, is crucial in gen-
erating knowledge for innovation. Educated individuals contribute specialised knowl-
edge, creative solutions, and novel approaches that support innovation. This result
corroborates the studies by Dakhli and De Clercq (2004) and Oluwatobi et al. (2016).
We also found that financial development does not significantly impact innova-
tion, according to both the system GMM and difference GMM methods.
Additionally, our analysis revealed that government expenditure and infrastruc-
ture development in Sub-Saharan Africa appear to hurt innovation.
327
As the effect of climate finance and institutional quality on innovation may be
non-linear, we assessed the non-linear effect of climate finance, institutional qual-
ity, and their interaction on innovations in SSA. Even though this estimation is not

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the prime focus of this study, it made us more optimistic about knowing whether
climate finance and institutional quality have a non-linear relationship with inno-
vations. The results are reported in table A1 in the appendix. The results reveal
that the square of climate finance negatively affects innovation, implying that
overreliance on climate finance in the context of SSA will diminish innovation
development. Also, we recognized that the square of institutional quality improves
innovations in SSA. This result points to the view that strong institutional systems
have an amplificatory effect on the fostering of innovations in SSA. After account-

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ing for the squared interaction between climate finance and institutional quality,
we found a negative impact on innovation. Interestingly, this result suggests that
SSA economies will not enhance innovation through institutional development if
they depend solely on climate finance as their resource construction.

Given that the institutional quality index positively affects innovation systems, we
extended the analyses to look into the multidimensional constructs of institutional
quality by considering the influence of control of corruption and political stability.
The results reported in table A2 in the appendix show that corruption control has
a positive effect on innovation in SSA. Additionally, the interaction between climate
finance and corruption was found to have a positive and significant effect on innova-
tion, suggesting that corruption control serves as a key channel through which cli-
mate finance impacts the innovation system in SSA. As far as political stability is
concerned, we realize a positive and significant impact on innovation. Surprisingly,
we also found that the interaction between climate finance and political stability as
reported in Model 2 in the appendix was positive and significant. This result sug-
gests that political stability is not a prime factor necessary for SSA economies to
drive substantial climate finance and enhance innovation. It is important to note that
all econometric tests, including the second-order serial correlation test and Hansen
test for over-identification restrictions, were passed, as indicated by the non-rejec-
tion of the null hypothesis in both AR (2) and Hansen tests.

5.7 MARGINAL EFFECT OF CLIMATE FINANCE ON INNOVATION

Although table 6 indicates that the interaction between climate finance and insti-
tutional quality is positive and significant, the actual impact of climate finance
on innovation can be determined through the marginal effect (conditional effect).
We report the marginal effect result in table 7.

The marginal effect results in table 7 show that at the lower percentile levels (10th
and 25th) of institutional development, an increase in climate finance negatively
and significantly affects innovation in SSA. Undoubtedly, in an economy where
the institutions are weak, climate funds will be diverted and not invested in novel
328 technologies that will drive innovation development. This finding supports the
results of Sharma, Sousa and Woodward (2022) and Donges et al. (2023). Further,
we noticed that at the medium (50th) percentile of institutional development in
SSA, the coefficient of the interaction between climate finance and institutional
quality is positive but insignificant.
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Table 7
Marginal effect of climate finance on innovation
Percentile Percentile values System-GMM Difference GMM
-0.959** -0.418
10 0.021
(0.361) (0.316)
-0.461** -0.184
25 0.261
(0.216) (0.184)
0.053 0.058
50 0.509
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(0.172) (0.084)
0.577* 0.304**
75 0.762
(0.291) (0.148)
0.910** 0.460**
90 0.922
(0.397) (0.232)
Note: ** and * represent significance at 5% and 10%, respectively.
Source: Authors.

The findings connote that at the median level of institutional development, climate
finance in SSA will not yield beneficial outcomes in enhancing innovation due to
the endemic nature of corruption persisting in SSA. Moreover, at the higher level
(75th to 90th) of institutional development in SSA, we found that climate finance
positively and significantly affects innovation. The result suggests that the full
benefits of climate finance on innovation can be realised when institutions are
highly effective. This finding implies that climate funds can be directed to innova-
tive programs only when institutions in SSA experience significant improvement.

5.8 DUMITRESCU–HURLIN PANEL CAUSALITY TEST RESULTS

We adopted Dumitrescu and Hurlin’s (2012) panel causality test to analyse the
causal link among the main variables of interest. The results are reported in table 8.

Table 8
Dumitrescu-Hurlin panel causality test results
Variables W-bar-Stat. Z-bar-Stat. Prob. value Conclusion
INNO ˃ CF 2.758 1.818 0.069*
↔
CF ˃ INNOV 3.836 4.403 0.000***
INNO ˃ IQ 7.047 12.102 0.000***
↔
IQ ˃ INNOV 4.472 5.927 0.000***
CF ˃ IQ 3.366 3.275 0.001***
↔
IQ ˃ CF 5.222 7.725 0.000***
Note: *** and * denote significance at 1% and 10% levels, respectively; > denotes the direction
of causality; ↔ signifies a bidirectional causality, and → denotes a one-way causality.
Source: Authors.
Regarding the result reported in table 8, we discovered a bidirectional causal rela-
tionship between climate and innovation in SSA. Although the causal link between
329
innovation and climate finance was weak, the findings suggest that a rise or decline
in climate finance will raise or dwindle innovation development in SSA. This
outcome is in line with the findings from Pradhan et al. (2023), Kim, Kwon and
Kwon (2015), and Udvari and Ampah (2018).

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Furthermore, the study detected a bidirectional causality between institutional
quality and innovation. This result implies that strong institutions in the context of
SSA are necessary to ensure innovation development. The result confirms the evi-
dence by Donges, Meier and Silva (2023) and Sharma, Sousa and Woodward
(2022). Lastly, we observed a two-way link between institutional development
and climate finance in this study. This finding implies that international donors
and private financial institutions closely examine the institutional development

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FRANK ADU, ROSHELLE RAMFOL: CLIMATE
level before providing climate funds. Countries with poor institutional structures
will attract low climate funds, whereas countries with better institutional struc-
tures will amass considerable donations (Ballesteros et al., 2010). Therefore, to
secure substantial climate funding, the sub-regions in SSA should strengthen their
institutional development.

6 CONCLUSION
Innovation has gained more traction in the 21st century since it is recognized as a
sure tool for economic development. Scholars have postulated that innovation is a
critical dynamic resource that brings about variations in growth, productivity, and
competitiveness among countries and firms. As a result, a nation’s ability to
enhance its innovative capability is deemed critical. However, empirical evidence
on how climate finance can be directed to enhance innovation and achieve com-
petitive advantage has been dominated by data from developed and emerging
economies, ignoring less developed nations like those in SSA. As SSA economies
top the chart as the highest recipients of climate finance, it is prudent to investigate
how climate finance can ensure innovation development. In line with this, the cur-
rent study examines the effect of climate finance on innovation by allowing the
link to be mediated by institutional quality in SSA. Employing the system-GMM
estimation technique on a balanced panel dataset covering 2011 to 2022, the
results established two impacts of climate finance on innovation: a direct uncon-
ditional and a conditional impact. While climate finance directly reduces innova-
tion in SSA, its indirect effect – through institutional quality – is positive, suggest-
ing that strong institutions help channel climate finance toward fostering innova-
tion. Given these findings, the study concludes that climate finance can improve
innovation in SSA when strong institutions direct the funds to productive sectors
from which innovation will benefit. As a result, making institutions in SSA work
better and stronger is necessary to allow the economies to reap the full benefit of
climate finance on innovation. Therefore, we recommend that policymakers and
governments in SSA institute policy measures geared toward improving the effec-
tiveness and performance of institutions. However, these measures should be
330 tilted towards ensuring political stability and intensifying the rules that specify
contract rights and control of corruption. These will ensure a stable environment
conducive to the attraction of climate funds and other investment packages to
enhance innovation systems in SSA.
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Disclosure statement
The authors have no conflict of interest to declare.
SYSTEMS IN SUB-SAHARAN AFRICA
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336 APPENDIX

Table A1
Effect of climate finance and institutional quality on innovation in SSA (non-linear
system-GMM results)
49 (2) 309-337 (2025)
economics
public sector

Coefficient
Variable Model 1 Model 2 Model 3
-0.253*** -0.273*** -0.005
lnINNOVit – 1
(0.059) (0.081) (0.012)
-1.439*
SQCF
(0.694)
1.435** 1.541**
IQ
(0.608) (0.681)
-1.099* -0.052
lnCF
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FINANCE, INSTITUTIONS AND INNOVATION
FRANK ADU, ROSHELLE RAMFOL: CLIMATE

(0.570) (0.749)
3.463*
SQIQ
(1.871)
0.805* 22.529**
lnCF_IQ
(0.454) (1.078)
-3.085**
SQCF_SQIQ
(1.095)
-1.383 -1.369 2.241**
lnGDPPC
(1.549) (1.212) (0.788)
0.010 0.015** 0.005
HC
(0.005) (0.004) (0.005)
-1.464 -0.889 0.046
IFRAD
(1.167) (1.385) (0.439)
-9.912* -11.830** 6.330***
lnGE
(4.972) (4.987) (2.126)
6.869* 5.634 -7.057***
lnFD
(3.368) (3.454) (1.295)
1.435** 3.463*
Net/marginal effect
(0.608) (1.871)
18.732 25.500 -8.477
Constant
(16.225) (17.185) (7.984)
AR(2) test statistic -1.060 -0.610 0.200
AR(2) P-value 0.290 0.545 0.845
Hansen test statistic 6.880 5.560 10.340
Hansen P-value 0.737 0.724 0.500
No. groups 22 22 22
No. instruments 20 20 20
Table A2
Effect of climate finance and institutional quality on innovation in SSA (system-GMM
337
results)
Coefficient
Variable
Model 1 (Corruption) Model 2 (Political stability)
-0.0224*** -0.0282***

49 (2) 309-337 (2025)

economics
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lnINNOVit – 1
(0.0077) (0.0082)
0.2341* 0.2872*
lnCF
(0.1299) (0.1648)
0.9704 12.7816***
IQ
(1.4483) (4.0337)
0.3464* 0.0278
lnCF_IQ
(0.1786) (0.9146)
-2.4345 -3.2546
lnGDPPC
(1.5679) (1.6244)

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FRANK ADU, ROSHELLE RAMFOL: CLIMATE
-0.0007 0.0045
HC
(0.0045) (0.0029)
0.9363 1.2717**
IFRAD
(0.8260) (0.5709)
-6.5124 -6.6579*
lnGE
(3.8685) (3.7287)

0.5256 2.9371
lnFD
(1.5001) (2.0951)

35.6356** 36.4524**
Constant
(17.7762) (17.1689)
AR(2) Test statistic -0.910 -0.880
AR(2) P-value 0.362 0.379
Hansen test statistic 6.430 7.040
Hansen P-value 0.696 0.633
No. groups 22 22
No. instruments 19 19