The Heat Is On: Climate Change–Related Challenges and SMEs' R&D Activities

ABSTRACT Investing in R&D is a key way for small‐ and medium‐sized enterprises (SMEs) to develop capabilities that are required to respond to climate change–related challenges. However, the extent to which such challenges affect SMEs' R&D activities remains a critical gap in the literature. Our study is the first to explore this gap, using detailed firm‐level data on 1730 SMEs from a new module in the Innovation in Irish Enterprises (IIE) survey on SMEs' climate change–related challenges. Using a matching approach combined with probit regression analysis, we find that climate change–related challenges can increase the probability of SMEs investing in R&D and engaging in continuous, as opposed to occasional R&D. These impacts are mainly driven by higher costs/input prices resulting from climate change. Our study makes novel contributions regarding the importance of R&D for SMEs responding to climate change. These insights are critical for SMEs and policymakers, regardless of country context.