Financial Development, Technological Innovation, and Environmental Degradation: Evidence from Lower-Middle-Income Countries in Asia

Abstract This study analyzes the causal relationship between financial development and technological innovation, considering their impact on environmental degradation. The data sample covers nineteen lower-middle-income countries in Asia over the period 2000-2021. By using the panel vector autoregression (PVAR), the authors demonstrate the close relationship between financial development and technological innovation. Specifically, technological innovation fosters financial development in both the short and long term, while the latter plays a vital role in driving the former over the long term. Furthermore, financial development is reported to worsen environmental degradation in these countries in both the short and long run. These findings imply that while financial development provides essential financial resources for technological innovation, it may also contribute to environmental degradation by stimulating business activities, investment, and energy consumption. Meanwhile, technological innovation promotes financial development but has not significantly improved the ability to mitigate environmental degradation in these countries. These findings align with the characteristics of lower-middle-income countries, where financial resources for business expansion and technological innovation are prioritized, but measures to stop environmental degradation remain limited. In light of the findings, the study provides recommendations for governments and policymakers in these economies, emphasizing the need to promote financial development coupled with minimizing environmental degradation, particularly by further innovating technology to achieve substantial environmental benefits.