Beyond Compliance: The Role of Climate Policy Stringency and Financial Institutions in Cleantech Startup Entry

This study examines how environmental regulations can drive technological change, drawing on the innovation systems perspective and the strong Porter hypothesis (SPH). The SPH suggests that well-designed stringent regulations can foster innovation and enhance firm competitiveness, performance, and survival, yet prior research remains largely conceptual. Analyzing data on 18,110 cleantech startups aggregated into country-level panels across 33 countries from 1998 to 2019, we empirically examine the mechanisms through which different policy instruments shape entrepreneurial entry within the SPH framework. We find that market-based instruments provide the strongest direct stimulus to cleantech entrepreneurship, reflecting the role of demand-side inducements. Moreover, technology-support measures also have a significant positive effect on cleantech firms' entry, suggesting that such policies effectively offset innovation and commercialization costs. Additionally, these demand and cost channels become more effective when innovation systems supply adequate financial support. However, the effect of non-market-based instruments on cleantech startup entry is insignificant, which points to the limited effectiveness of compliance-based measures. Our novel contribution is to show that, within the context of the SPH, the effectiveness of climate policy is contingent upon both policy design and complementary institutional support.