Financial constraints have an important impact on the development of eco-innovations but their effect varies according to the type of funding. This article studies the interaction between public funding on the one hand, and internal and external lack of funding on the other. The empirical analysis is based on a sample of European small- and medium-sized enterprises, and exploits information on firms’ involvement in eco-innovation activities, their drivers, and obstacles. Our results show that, even accounting for demand-pull effects and regulatory interventions, access to public funds and fiscal incentives is effective for improving the firm’s ability to introduce eco-innovations, particularly if the company has ample funds from either internal or external sources. Our findings suggest also that public funding is perceived by firms as complementary to other external finance.
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