Investment Efficiency in Manufacturing SMEs under Green Finance Incentives and Knowledge Diffusion

Abstract

The transition towards sustainable manufacturing requires substantial capital investments and advanced technological capabilities, particularly for small and medium-sized enterprises. This paper explores the mechanisms through which green finance incentives and knowledge diffusion interact to explain investment efficiency in manufacturing small and medium-sized enterprises. Despite the increasing availability of green credit and environmental subsidies, these enterprises often suffer from underinvestment in high-risk sustainable projects or overinvestment in redundant conventional assets due to severe information asymmetry and a lack of absorptive capacity. By conceptualizing a dual-channel theoretical framework, this study argues that green finance provides the necessary liquidity and risk mitigation, while knowledge diffusion facilitates managerial foresight and technological adoption. Drawing on a comprehensive dataset of manufacturing enterprises, the empirical analysis reveals that green finance incentives significantly reduce financial constraints, thereby improving baseline capital allocation efficiency. Furthermore, knowledge diffusion acts as a critical moderating mechanism. Enterprises embedded in dense knowledge networks demonstrate a substantially higher capacity to translate green financial support into optimal capital allocation, mitigating both overinvestment and underinvestment tendencies. The findings offer crucial insights for policymakers aiming to design holistic support systems that combine financial instruments with capacity-building knowledge initiatives to foster long-term sustainable economic growth.