(iPoster) How Does Climate Finance Affect the Ease of Doing Business in Recipient Nations?

• In Event: Poster Session: International Political Economy I & Perspectives on Canadian Foreign Policy
  In Poster Session: Poster Session: International Political Economy I

Abstract

Developing countries face a disproportionate threat from climate change. As such they require and receive significant flows of financial support to address the menace. However, little is known about the potential externalities of this form of external liquidity for the business sector in developing nations. This paper evaluates the impact of climate finance on the ease of doing business (EODB). On the one hand, climate finance might lead to an improved business environment as the funds might facilitate infrastructure provision, technological innovation, and international collaboration for recipient countries. On the other hand, however, the business environment might be negatively impacted by complex new regulations, disruptive technological transitions, market distortions, and resource diversions. Countries receiving climate finance may also introduce new environmental and business regulations, implement new technologies, and divert resources to new programs to justify the receipt of aid or demonstrate a commitment to balancing economic development with environmental objectives. We theorize that given the expected disruptions to business, climate finance should negatively impact the EODB. We also argue that this negative impact will be more severe for resource-rich countries than for their resource-poor peers. Countries rich in natural resources might experience higher disruptions to business operations as they attempt to balance resource-dependent economic operations with environmental objectives mandated by climate finance. Using panel data for 86 recipient countries for the years 2002-2021, we test our hypotheses using the Generalized Methods of Moments (GMM) technique. The baseline results suggest that climate finance has a weak positive impact on the EODB. However, as argued, resource-dependence heterogeneity analysis reveals that climate finance significantly negatively disrupts the EODB in resource-rich countries. Further, a sectoral comparative analysis shows that while climate finance has a significant positive impact on the growth of the service sector, it significantly degrades the growth of the resource sector, affirming the argument that climate finance might attract higher disruptions to resource-dependent business operations. By implication, lowly diversified economies might realize more negative than positive effects of climate finance, and investors should consider providing support to ease the pains of transition from resource-intensive growth to clean energy-driven development strategies.

Author

• John Taden, Pepperdine University