The Impact of Climate Transition Pressure on Innovation Participation of Small Enterprises in China: The Moderating Role of Digital Finance

Abstract

This paper examines the impact of climate transition risks on innovation participation of micro and small enterprises (SMEs) in China and explores whether digital finance can mitigate these impacts. Using firm-level data from the 2014 China SME Survey, combined with provincial digital finance inclusion index data, the study employs a Probit model to analyze firm innovation participation and uses an OLS framework to examine the impact of financing constraints. To capture the heterogeneity of transition pressures, the study categorizes firms based on the transition pressures of their respective industries. The results show that digital finance significantly increases the likelihood of SMEs participating in innovation and alleviates their financing constraints. While climate transition risks themselves do not have a significant direct impact on innovation participation, the interaction between digital finance and high transition risk is positive and statistically significant, indicating that digital finance has a stronger innovation-promoting effect on firms in high-risk industries. Mechanism analysis shows that digital finance primarily supports innovation by alleviating overall financing frictions faced by SMEs. These findings highlight the complementary role of digital finance in supporting firms’ innovation in response to climate transition pressures and provide policy implications for promoting financial inclusion and facilitating a smooth low-carbon transition in emerging economies.