Does country-level climate change performance matter to corporate innovations?

Purpose This study examines the relationship between corporate innovation and climate change performance at the country level. We also explore how managerial ability and market concentration affect this relationship. Our study provides an in-depth perspective into firms' strategic innovation decisions against the backdrop of environmental performance. Design/methodology/approach We use datasets of 63,450 firm-year observations across 8,921 unique firms in 24 countries from 2007 to 2021; we employ regression analysis with firm and country-level controls. We apply instrumental variables, the Heckman selection model and alternative specifications such as the hierarchical model, generalized least squares model and quantile regressions to address endogeneity and econometric concerns. Findings We find a positive and significant relationship between corporate innovation and climate change performance in the country where the firm is located. Firms in countries with good climate change performance spend more on corporate innovation. However, high managerial ability slightly dampens this effect. Market concentration also moderates this relationship, reducing corporate innovation incentives in highly concentrated industries. Research limitations/implications Our study relies on only available public firm disclosures on R&D in our sample. Future research could explore private firms and sector-specific variations. Practical implications Our findings suggest policymakers should design climate regulations that incentivize corporate innovation while considering managerial decision-making. When making investment decisions, investors may also assess corporate innovations as managerial strategies in climate-conscious countries. Originality/value This paper contributes to the climate finance and corporate governance literature by demonstrating that managerial ability and market conditions significantly shape the climate-innovation nexus. It expands prior research using a comprehensive climate performance index and broader innovation measure.