Impact of Financial development and Technological innovation on environment sustainability: Does Government Effectiveness Moderate?

Abstract

This research examines the complex interplay between financial development, technological innovation, and environmental sustainability, with particular focus on the moderating role of government effectiveness in these relationships. Financial development serves as a critical catalyst for investments in sustainable technologies and environmental improvements, while technological innovation drives eco-friendly advancements. However, these factors alone may prove insufficient for achieving sustainability goals without robust governance structures to effectively implement environmental policies and manage natural resources. Using panel data from five South Asian countries Pakistan, India, Sri Lanka, Bangladesh, and Nepal spanning the period from 1996 to 2022, this study employs the Fully Modified Ordinary Least Squares (FMOLS) model to analyze these relationships. The empirical findings reveal that technological innovation exerts a positive and significant effect on environmental sustainability, while financial development demonstrates a negative and substantial impact on environmental outcomes. Furthermore, government effectiveness plays a crucial moderating role in the relationship between financial development and environmental sustainability, though it does not significantly moderate the relationship between technological innovation and environmental sustainability. These results underscore the pivotal importance of effective governance in bridging the gap between innovation, finance, and sustainable environmental practices. The study contributes valuable insights for policymakers seeking to align economic development strategies with global sustainability objectives, emphasizing the need for strong institutional frameworks to maximize the environmental benefits of financial and technological progress.