Do technological innovation and financial development determine environmental quality? Empirical evidence from Arab countries

Abstract

Purpose

The Arab countries have numerous environmental problems, including massive emissions of carbon dioxide, climate change and increasingly high temperatures. Many prior studies have explored the various determinants of environmental quality. However, few papers offer adequate empirical evidence on the role of technological innovation and financial development in determining environmental quality. To fill this gap, this study aims to investigate the impact of technological innovation and financial development on CO₂ emissions, controlling for several factors.

Design/methodology/approach

The study sample data cover 10 Arab countries over a 30-year period. Because of the existence of non-stationarity and cointegration, the authors use dynamic ordinary least squares and fully modified ordinary least squares models to perform regressions among the variables.

Findings

The statistical results reveal that technological innovation and financial development both negatively determine CO₂, which implies that both factors ensure environmental quality in this region. A developed financial sector facilitates access to funds for technological innovation and thus enables the adoption of cleaner production technologies and renewable energy sources. Both factors reduce environmental degradation. In addition, advanced financial systems incentivize investment in ecofriendly projects and promote sustainable practices, fostering a conducive environment for improving environmental quality. The empirical analysis then reveals the pollution halo effect of foreign direct investment inflow.

Research limitations/implications

Based on the empirical findings, the authors recommend increasing investment in research and development activities and pay more attention to improvement of the financial sector. Both factors can enhance environmental sustainability in Arab countries.

Originality/value

This study provides robustness for prior analyses and adds to the literature by widening the coverage to include Arab countries.

Citation

Tabash, M.I., Farooq, U., Hassen, M. and El Refae, G.A. (2025), "Do technological innovation and financial development determine environmental quality? Empirical evidence from Arab countries", Review of Accounting and Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/RAF-02-2024-0050