Purpose This paper aims to examine the moderating role of environmental taxation on the relationship between environmental engagement and innovation in Small and Medium-sized Enterprises (SMEs) within the Middle East and North Africa (MENA) region. Design/methodology/approach The authors use data from the 6th wave of the Business Environmental and Enterprise Performance Survey with a total of 2,686 observations. It presents pooled cross-sectional data that covers the period from 2018 to 2020. The data set covers five nonoil MENA countries (Egypt, Jordan, Lebanon, Morocco and Tunisia). The authors construct innovation score using various measures: product, process, radical, green innovations and an innovation score for MENA SMEs. The method used is the Joint Correspondence Analysis method. The authors also check the penalized splines method to assess the nonlinear effect of environmental engagement on innovation scores, distinguishing between firms subjected to environmental taxes versus those that are not. Findings The results reveal that environmental engagement positively impacts product and radical innovations, while its influence on green innovation is comparatively weaker. This relationship varies across countries. Environmental taxation fosters green innovation but limits broader innovation by diverting resources toward regulatory compliance. The penalized spline estimation underscores the nonlinear nature of this relationship, particularly for firms subject to environmental taxes, highlighting the importance of strategic, sustained environmental engagement for driving innovation. Practical implications This study contributes to the literature by offering new insights into the dynamics of environmental engagement and innovation under underdeveloped tax regimes. It also provides practical implications for SMEs and policymakers, emphasizing the need for balanced environmental policies that support sustainability without stifling innovation. Originality/value To the best of the authors’ knowledge, this is the first paper that investigates the moderating effect of environmental taxation on the relationship between environmental engagement and various innovation measures and a composite innovation index to represent a company’s overall level of innovation.
Hlioui et al. (Mon,) studied this question.