Can Capital Markets Drive Green Innovation in Institutionally Fragile Contexts? Dynamic Evidence from West Africa

Abstract

Transitioning to green technology innovation (GRIN) is critical for climate-vulnerable regions, yet high capital requirements deter investment in institutionally fragile contexts such as West Africa. While capital market (CAM) development can mobilise climate finance, existing studies largely rely on static models, overlooking the crucial transmission channels and governance conditions shaping this nexus. Addressing these gaps, this study investigates the dynamic CAM–GRIN relationship across four West African economies (Nigeria, Ghana, Côte d’Ivoire, and Senegal) from 2010 to 2025. Employing a heterogeneous Panel Autoregressive Distributed Lag (PMG-ARDL) framework, financial intermediation is explicitly modelled as a mediator and institutional quality as a moderator. The findings demonstrate that CAM significantly drives GRIN; a 1 percent market expansion increases long-run green innovation by 31.2 percent and short-run innovation by 14.5 percent. Financial intermediation robustly mediates this relationship, effectively directing resources toward sustainable sectors. Furthermore, institutional quality and ESG transparency significantly amplify the CAM–GRIN nexus, although country-specific estimates reveal structural heterogeneity. We conclude that capital market deepening is a necessary but insufficient condition for advancing green transformation. To accelerate climate-resilient development, policymakers must complement market expansion with enhanced banking-sector efficiency, robust regulatory enforcement, and standardized ESG disclosure frameworks.