Financial Globalization, Technological Innovationand Environmental Performancein Developing Countries

Abstract

This study examines how financial development (FD) and technological innovation (TI) influence environmental performance in developing economies, using a balanced panel of 51 countries from 1995–2024. To account for cross-sectional dependence, unobserved heterogeneity, and heterogeneous long-run dynamics, the analysis applies Driscoll–Kraay pooled OLS, Driscoll–Kraay fixed effects, and the Augmented Mean Group (AMG) estimator, with additional estimates for lower-middle-income (26) and upper-middle-income (25) subsamples. The results indicate that the effects of FD and TI are not uniform across estimators or income groups. Financial development is generally weak in pooled and fixed-effects models but becomes positive in the full-sample AMG specification, suggesting that finance contributes to environmental performance only when long-run heterogeneity and common shocks are properly modelled. Technological innovation is positive in pooled and fixed-effects estimates for upper-middle-income countries and the full sample,yet loses robustness under AMG, implying that measured patenting does not consistently translate into greener outcomes across heterogeneous developing contexts. GDP is more consistently positive, especially in upper-middle-income economies, while the AMG common dynamic process is large and significant, highlighting the role of shared global trends such as climate policies and energy-price cycles. The findings underscore that greener development requires directing finance and innovation toward clean investment and eco-innovation, supported by strong institutions and targeted policy instruments.