Is proximity better? The geographical proximity of financial resources and green innovation

Abstract The agglomeration of financial resources is generally considered to encourage business practices that promote green innovation. In addition, green innovation is also subject to firms' location and may exhibit significant spatial effects. However, most studies failed to consider the complex association between financial resources and green innovation from the lens of geographical proximity. This paper scrutinizes the influence of geographical proximity of financial resources on green innovation with the case of Chinese listed firms. It critically examines the role of trade‐offs between competitive and substitution effects triggered by geographical proximity in this complex relationship. The findings demonstrate that the geographical proximity of financial resources affects firms' trade‐offs between competitive and substitution effects, changing their green innovation activities. In addition, green innovation and distance to financial centers have an inverted U‐shaped association, suggesting an optimal location between the firm and financial centers conducive to green innovation. Finally, internal ownership reinforces the effect of geographical proximity of financial resources on green innovation, while external environmental regulation weakens this effect. Therefore, this paper extends the existing green innovation theory from the lens of geographic proximity. This can help us better understand the influence of geographic proximity of financial resources on green innovation.