The role of government fiscal incentives in green technological innovation: A nonlinear analytical framework

Yuezhen Fan and Linsong Shi

International Review of Economics & Finance, 2025, vol. 103, issue C

Abstract: In the context of escalating global climate risks and severe environmental degradation, the advancement of green technological innovation is critical for enhancing the effectiveness of ecological governance and promoting sustainable socioeconomic development. However, the inherent externalities associated with green technology research and development often lead to market failures, resulting in the inefficient allocation of innovation resources and diminishing incentives for firms to invest in R&D activities. This study focuses on the incentive effects of government fiscal policies, examining the dynamic relationship between fiscal support and green technological innovation in China over the period from 2000 to 2023. It further investigates the mechanisms through which fiscal policy interventions influence innovation outcomes, thereby integrating environmental governance objectives into the broader economic development agenda and offering practical insights for developing economies pursuing sustainable development goals. Empirical findings demonstrate an inverted U-shaped relationship between government fiscal support and green technological innovation: at initial stages, fiscal support significantly promotes innovation activities; however, beyond a certain expenditure threshold, excessive government intervention exhibits a crowding-out effect, thereby inhibiting regional innovation dynamics. This result remains robust across various robustness checks, including the incorporation of interaction-fixed effects, alternative estimation techniques, variable measurement adjustments, and instrumental variable approaches. Additionally, fiscal policies are found to facilitate industrial upgrading and the reduction of fossil fuel dependency, both of which serve to strengthen green technological innovation. Conversely, fiscal investments that contribute to the reduction of environmental pollution may paradoxically weaken firms' incentives to engage in further green R&D. Finally, the positive impact of fiscal support is more pronounced in regions characterized by lower levels of economic development, stronger capacities for pollution control, and lower greening rates. Based on these findings, the study offers policy recommendations tailored to the investment-output dynamics of fiscal interventions and the heterogeneous features of regional economic development, thereby providing valuable guidance for the design and optimization of green fiscal policies.

Keywords: Fiscal policy; Tax incentives; Policy subsidies; Green technological innovation; Innovation incentives; Sustainable development (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:103:y:2025:i:c:s1059056025006926

DOI: 10.1016/j.iref.2025.104529

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