Three essays on Innovation, Financial Stability and Sustainable Economic Growth

Abstract

The Intergovernmental Panel on Climate Change (IPCC, 2018, 2021, and 2023) has reiterated that limiting global warming to 1.5°C above pre-industrial levels requires unprecedented technological, financial, institutional, and international cooperation. Addressing this low carbon transition under UN SDG 9 and 13 necessitates a transformative reorientation of technology innovation, a resilient financial system, and foreign investment flows. As climate risk has also appeared as one of the significant threats to financial stability, it underlines the relevance of a sound financial system as well as environmentally directed investment. The thesis seeks to investigate the interrelationship between environmental R&D, financial stability, and foreign direct investment (FDI), as well as the role of global climate policy and country governance policy frameworks such as the Paris Agreement and the EU Emissions Trading System (EU ETS), and institutional quality. Three main questions are addressed: does environmental research and development (R&D) impact CO2 emissions, and how do global climate policies affect this relationship? Does climate-related risk (both physical and transition) influence financial stability? Does the mode of entry of foreign direct investment (FDI) enhance green technology innovation? These questions are interrogated using firm and country-level panel datasets spanning from 2002 to 2023 and high-dimensional panel fixed effects (firm, country, and year) regressions with robust standard errors clustered at the country-level to address heterogeneity issues over time and across economies. The study reveals that an increase in environmental R&D investment significantly limits CO2 emissions, while the impact weakens with the interaction of global climate policies such as the
Paris Agreement and the EU ETS. The findings support theoretical predictions developed from Natural Resource Based-View (NRBV) and endogenous growth. Secondly, climate-related risk significantly heightens financial instability. Additionally, the destabilising effect of the financial system amplifies with the introduction of public policy intervention. However, environmental R&D innovation strengthens financial stability by mitigating the adverse effects
of climate transition risk, particularly in relation to solvency and credit risk. Finally, both entry mode FDI (greenfield and M&A) have a positive effect on green technology innovation. However, greenfield FDI exhibits a more substantial impact than mergers and Acquisition (M&A).
Overall, the study offers an integrated picture that suggests that innovation, financial stability, and FDI uniformly bolster the agenda of decarbonisation or net zero. This study contributes to literature on how environmental R&D, climate risk, and entry mode of FDI (greenfield and M&A) drive financial stability and sustainability. The interrelationship is strengthened by introducing of combined policy mix such as the global climate policies (Paris Climate Agreement and European Emissions Trading System) and institutional quality which support
the transition toward low-carbon economy. The thesis embedded firm-level, financial institution system, and global level into a single empirical structure. The thesis also provides relevant policy implications. For example, enhancing global climate policies and institutional quality, and aligning them with innovation incentives, can attract and stimulate both Greenfield and M&A FDI. These, in turn, promote environmental technology innovations, improve financial stability, and facilitate the global transition towards achieving net-zero as well as sustainable growth.

Date of Award	15 May 2026
Original language	English
Awarding Institution	Bangor University
Supervisor	Yener Altunbas (Supervisor) & Danial Hemmings (Supervisor)