When Does Climate Finance Foster Green Innovation? The Role of Human Capital Thresholds in Developing Countries

ABSTRACT This study examines the role of human capital and its specialization in optimizing climate finance for green innovation in developing countries. By identifying a critical threshold of human capital, this research provides actionable insights for policymakers on how to improve the effectiveness of climate finance in promoting ecological transitions. Dynamic panel analyses using the two‐step system generalized method of moments (GMM) on a sample of 42 countries over 2017–2022 show that climate finance has a conditional negative effect on green innovation intensity and capacity. Human capital adversely affects green innovation below the critical threshold of 0.6. Above this threshold, however, it becomes a significant driver for green innovation, significantly reinforcing the effect of climate finance. Human capital specialization in technical fields (NATS_MSICM), information and communication technologies, and environmental sciences (ENVS_HW) is more conducive to ecological transition than specialization in social sciences, law, and business administration (SOCS_BAL), even though the latter category promotes green innovation intensity. The results suggest that the optimal allocation of skilled human capital to improve the effectiveness of climate finance involves less than 38% in the social sciences (SOCS_BAL) and more than 21%, 22%, and 6% in the fields of NATS_MSICM, ENVS_HW, and ICT, respectively. In light of these findings, developing countries need to improve both the level and quality of their human capital to acquire the skills necessary to initiate the green transition, attract climate finance, and effectively use it to support the transition.