The Heat Is On: An Exploratory Investigation of How Climate Change-Related Challenges Affect SMEs’ R&D Activities

Climate change can cause major challenges for Small and Medium-sized Enterprises (SMEs). Responding and adapting to such challenges is crucial, as SMEs are vital for driving economic growth and employment in most countries. Investing in R&D is a key way in which SMEs can build the capacities required for responding and adapting to climate change-related challenges. However, the extent to which such challenges affect SMEs’ R&D activities remains a critical
gap in existing knowledge. Using detailed firm-level data on 1,730 SMEs in Ireland, our study is the first to explore this issue. We achieve this, using information on SMEs’ climate change-related challenges, from a new module of the 2018-2020 wave of the Irish part of the Community Innovation Survey (CIS), the Innovation in Irish Enterprises Survey (IIE). By combining a matching approach with probit regression analysis, we find that climate change related challenges can increase the probability of SMEs investing in R&D. Such challenges can also increase the probability of SMEs engaging in continuous, as opposed to occasional R&D. Based on our findings, the above impacts are mainly driven by climate change, resulting in higher costs/input prices. Our study highlights the importance of R&D for SMEs to adapt and respond to climate change and provides critical insights for SMEs and policymakers alike.