Determinants of Indonesian MSMEs’ Green Investment Choices Towards Inclusive and Sustainable Economic Growth

MSMEs are catalysts for economic growth in both rural and urban areas. In light of this, MSMEs should have equitable access to the numerous resources required for their innovation. However, environmental sustainability should also be considered with these developments. Therefore, it is necessary to conduct a study on the factors that influence MSMEs’ selection of green investments. This study analyses whether financial literacy and financial behaviour could determine the green investment choices in micro, small and medium enterprises (MSMEs). Data collection in this study used a survey technique for MSMEs in Magelang and received 195 respondents. Data was then analysed using multiple regression analysis. The results show that positive financial behaviour is related to more sound green investment decisions of MSMEs owners. In addition, this study also finds educational background influences the selection of MSMEs green investments. Financial behaviour can have an impact on investment innovation because MSMEs owners who pay more attention to their financial position will be able to manage risk tolerance better, so they are more attracted to more green investments. The results of this study will corroborate previous research showing that individuals with greater financial behaviour make reasonable financial decisions based on their risk preferences


Introduction
Digital innovation, government programs, and policies are fostering MSMEs' growth and opportunities for inclusive economic growth and sustainability through entrepreneurship.Indonesian government is committed to increasing the financial inclusion index to 90% in 2024.Furthermore, this vision is also in accordance with the G20 Presidency's top priorities, which will contribute to financial inclusion and sustainable finance [1].
First, these initiatives are carried out by utilizing open banking to increase productivity, support the economy, and financial inclusion for the community, especially women, the younger generation, and MSMEs.In 2022, only 15 million MSMEs can receive financing loans through the conventional banking system.Meanwhile, another 30 million MSMEs do not have access to formal financial institutions.By 2025, the Financial Inclusion Program aims to provide up to 85% of finance to the MSME sector [2].
Second, the G20 Presidency also has an agenda to increase the financial sector's environmental sustainability.This agenda discusses climate risk towards a low-carbon economy and sustainable finance from a macroeconomic and financial stability perspective.Financial institutions are required to strengthen their commitment to implementing ESG or Environmental, Social, Governance principles, particularly in the MSME segment.The financial industry is shifting and giving priority to providing funds for various environmentally friendly projects [2].Therefore, it is essential for MSMEs to be able to innovate in projects that are sustainable for the environment.Innovation boosts productivity, lowers costs, increases productivity and delivery systems, and increases GDP per capital [3].However, they must consider their environmental impact of their investment activities.
MSMEs make investment decisions based on their resources and predictions for the future.This decision-making process is complex and multidimensional [4].One of the critical components includes knowledge of sources of finance to guide decisions on sources of financing.This knowledge is often obtained through training, education, and social networking [5].Financial literacy also has been shown to play an essential role in green investment decisions [6].It has also been shown that financial knowledge can improve people's welfare [5].For example, financial literacy allows individuals to recognise financial returns from green investment that excels average expected returns.This higher reward can motivate entrepreneurs who are financially literate to be more innovative in green investment.Given that the investment process can result in a higher probability of failure, even when knowledgeable entrepreneurs are willing to accept unexpected returns over long periods [7], it is critical to understand the antecedents of successful green investment.However, research on green investment in MSMEs is still very limited.
This gap is particularly urgent because MSMEs' choice of green projects also impacts the environment [8].Meanwhile, MSMEs are the foundation of economic growth [9].Therefore, examining the relationship between financial literacy and green investment in the MSMEs context is essential.Green investment is also part of green finance.Green finance refers to a market-based loan or investing program that considers the impact of the environment on risk assessment or uses environmental incentives to influence corporate decision-making.Green investment strives to increase social fairness, human well-being, and environmental protection while lowering threats to the environment and preserving ecological integrity.It also acknowledges the worth of the environment and its natural capital.[10].
This study will expand the theory of human capital in two main ways.First, how an entrepreneur with high financial literacy can influence green innovation.Specifically, CEOs gain knowledge and experience that materially influence their risk-taking behaviour [11].Financially literate entrepreneurs can recognise trade-offs between risk and return and potential financial returns.Such knowledge enables them to engage in green investments and innovations confidently.
Second, through the integration of human capital theory.This illustrates that the attributes of top executives directly affect company performance.The organisational practices of large companies often prove to be consistent with the values and beliefs of top managers [11].The leader's attributes are more likely to affect MSMEs because of fewer established norms and routines.Thus, MSMEs are an ideal place to combine human capital and upper-echelon theory.The MSME context allows us to examine directly how the owner's financial knowledge influences innovation.
Based on the previous discussion, this research has two objectives.The first is to explain the relationship between the financial literacy of MSMEs owners and MSMEs green investment activities.The second is to explain the relationship between the financial behaviour of MSMEs owners and MSMEs green investment activities.
This research provides various contributions to academics and practitioners.The contribution to the scientific development of this research is that it will add to the discourse in the fields of financial management and entrepreneurship and improve the contribution of MSMEs to the environment by creating sustainable innovation through green investment.Second, this research contributes to increasing financial inclusion of MSMEs to boost national productivity by improving the financial performance of MSMEs originating from the creation of sustainable innovations.

Literature Review and Hypotheses Development 2.1. Financial literacy and green investment
Human capital enhances innovation and firm performance [12].New innovative products are often created by recombining existing knowledge through social interaction and networking with banks and the mass media [13].Entrepreneurs with a high level of knowledge are willing to explore new things in innovative projects rather than adopting an overly conservative approach [14].
Financial literacy refers to two aspects of knowledge [6].First, individuals can fully assess the financial results of an investment by understanding the nominal and actual value of money.Second, individuals can measure investment risk.Taken together, people with high financial literacy will make more informed decisions about the trade-off between risk and return of the project under consideration.Basically, financial literacy is acquired and can influence an individual's willingness to take risks.
Previous research on human capital theory excluded financial knowledge from risk-taking, leaving a significant research gap in explaining risk-taking behaviour.Individuals with a higher level of human capital may have knowledge but not necessarily financial literacy.
The theoretical framework assumes that individuals with financial literacy can make decisions based on risk and return trade-offs, especially in green investments.Previous research on financial literacy supports this assumption that entrepreneurs with sound financial knowledge make good financial decisions on stock ownership, personal debt, retirement savings or active investment innovation [4], [6].Entrepreneurs with high financial literacy understand how to invest, balancing risk and return trade-offs for decision-making on risky financial investments, such as stocks or derivatives linked to higher-risk assets.
The term "green investment" describes financial actions that prioritize protecting the environment and using less natural resources.This kind of investment benefits the environment by lowering greenhouse gas emissions and air pollution while upholding the standard of production and consumption.New programs and technology are adopted by the green investing industry to guarantee environmental sustainability [15].Implementation of new technology implies higher risk assumed by the companies because of the uncertainty of the project's success.
Sustainable innovative projects are usually high-risk and have long cycles, unpredictable duration, and high failure rates [7].Individuals with high financial literacy are more likely to have better skills to choose risky innovative projects that offer high returns [6], [16].Good knowledge improves subjective risk perception and assessment.Thus, people with higher financial literacy are better prepared to make calculated choices [17] and are more likely to reap the rewards of investment risk.More importantly, such individuals tend to be more willing to take risks [4], [6].Having a high-risk tolerance is an underlying factor in decision-making.Therefore, entrepreneurs with high financial literacy are more willing to consider risks.Meanwhile, a higher level of willingness to take risks motivates them to engage in risky sustainable investments.MSMEs owners with a high level of financial literacy are motivated to take risks.This implies that financial literacy, apart from innovation, is essential in influencing risk attitudes [18].
Financial literacy is a way to improve human resources.Entrepreneurs with high financial literacy will recognize the potential financial benefits of taking on project risks.They will therefore be more likely to engage in green investments, which provide higher potential returns.Therefore, the first hypothesis of this study is as follows.
H1.The financial literacy of MSMEs owners is positively related to MSMEs' sustainable investment activities.

Financial behaviour and green investment
Beside financial literacy, green investment activities also affected by the behavioural aspect.An individual's intention can be seen of as a gauge of how strongly they are willing to adopt a particular behaviour or conduct.Furthermore, intention also can be seen as the sign of how much effort someone is willing to put forth to carry out a particular behaviour [19].
Moreover, low financial literacy has also been associated with poor financial behaviour that is likely to have long-term effects.Low literate people are typically less likely to engage a variety of sophisticated financial habits.This also true even in developed countries.A striking number of individuals make poor financial decisions, despite the fact that these choices are very important to their welfare.For instance, there is still a low level of participation in capital markets and retirement savings.Studies also reveal that consumers often save inefficiently and that under saving is common in many developed countries, suggesting that many may not be able to handle the increasingly complicated financial markets [20].A study in Germany shows that people with low level of financial literacy are less likely to participate in beneficial financial activities such as government subsidy programs.In the US, it is found that employees with low level of financial background either do not participate at all or contribute less than what is necessary to receive full employee benefit, thus foregoing matching payments that over time add up to significant losses [21].
The decision to engage in green investment is also affected by the MSMEs owners' attitude toward risk.As previously mentioned, green investment is considered to be a high-risk project.Therefore, MSMEs owners who have high financial literacy may control financial risk attitudes efficiently so that MSMEs owners can address issues and make sound financial decisions [18].In addition, individuals must practice advanced financial management in order to have the information, skills, and confidence necessary to recognize financial products and services [22].Based on the discussion above, the second hypothesis of the study is as follows: H2.The financial behaviour of MSMEs owners is positively related to MSMEs' sustainable investment activities.

Methods
This research has two objectives.The first is to explain the relationship between the financial literacy of MSMEs owners and green investment activities.The second is to explain the relationship between financial behaviour and MSMEs investment choices.Therefore, this type of research is quantitative research.This research is descriptive exploratory in nature by examining the relationship between financial literacy, financial behaviour, and MSMEs green investment activities.The data obtained is then selected, processed, and presented to provide empirical evidence of the relationship between the observed variables.
Data was collected using a questionnaire technique from July to September 2022.The respondents were MSMEs owners who resided in the City and Regency of Magelang, Central Jawa, Indonesia.These MSMEs were obtained from the Magelang City and Regency Office of Industry and Trade database.Cluster sampling technique was used to obtain the data sample.The population was divided into 22 district areas and eight to ten MSMEs from each district were randomly chosen as sample.In the end, we received 195 samples.
Financial literacy (FIN_LIT) is measured based on the responses of MSMEs owners to questions regarding the importance of financial knowledge, such as the time value of money (Question 1), inflation risk (Question 2) and diversification, risk/return and investment knowledge (Question 3) [4]- [6].The questions in the financial literacy construct are used to study the level of stock market participation, use of payday loans, and participation in the capital market from MSMEs owners.The number of correct answers to the questions measures the financial literacy of an MSME owner.The financial behaviour variable (FIN_BHVR) is represented by five questions regarding the financial habits of MSMEs owners.Financial behaviour is measured with a Likert scale of 1 to 5. A value of one means it has never been done, and five means it has been done very often.
In addition, the instrument also asked about the level of education of MSMEs owners (EDUC) and the length of time the business had been established (TENURE).EDUC is a classification indicator variable with a value of 1 if the respondent has elementary/junior high school education, 2 if the respondent has high school/vocational school education, and 3 if he graduated from university.TENURE is the length of year the business was founded.Another control variable is the number of employees employed by MSME businesses (EMPLY).
In measuring green investment choice activity (INV_PREF) it is done by asking questions about investment choices from MSMEs.Investment activity is measured on a categorical scale of 1 to 3, with 1 being an investment option with very low sustainability, 2 being an investment with moderate sustainability, and 3 being relatively higher sustainability.

Results and Discussion
Data was collected for approximately three weeks, from July August 2022.Questionnaires were distributed in twenty-two districts in Magelang City and Regency.The results obtained 195 questionnaires filled out by respondents and can be used for research analysis.As many as 56 percent of the respondents were male.The average age of the respondents ranged from 25 to 50 years.The average MSME business has been established for 1 to 5 years.However, most of the respondents are still in the micro business stage in terms of employees they have because as many as 31 percent of respondents still do not employ employees.Most of the MSME owners graduated from high school (74.9 percent).As many as 39 percent of MSMEs rent their place of business and 61 percent of the respondents are engaged in services or culinary/food.We conducted the Kolmogorov-Smirnov normality test and the results showed that the significance value is 0.054 > 0.05 so it can be concluded that the data is normally distributed.From the results of the multicollinearity test it is also seen that the VIF value of all variables is less than 10 and the tolerance value is greater than 0.1.In addition, we also tested the correlation between the independent variables using Pearson Correlation test, the result shows that there are no independent variables that are perfectly correlated with each other (less than 1) as shown in table 3. Table 4 shows the results of the regression test performed.The adjusted R-Square value of the equation model is obtained at 30.7 percent.This means that the dependent variable in the choice of MSME investment activity can be explained by all the independent variables used in the study by 30.7 percent.The rest is explained by variables other than observations in the study.The significance value of the F statistic is less than 5 percent.This means that the research model is robust.
It was found that the variables of financial behaviour (FIN_BHVR) and education (EDUC) had significant and positive effect on green investment selection by MSMEs (significance value less than 5 percent).Meanwhile, the financial literacy variable does not significantly influence MSMEs' green investment activities.Therefore, only the second hypothesis is accepted in this study, while the first hypothesis is rejected.Aren and Zengil (2016), due to their perception of risk, individual financial attitude may have an impact on their decision for green investments.[23].Education also has positive impact on green investment decision.This result is consistent with a body of literature that shows that a person can manage their finances more effectively the more education they have.As a result, they will favor investments that are more sustainable [15], [19], [24].
Financial literacy does not affect the decision of green investment activities.This result is in line with the research conducted by Anderson and Robinson (2022).They found out that the likelihood of pro-environment families owning pro-environment investments is not higher.They are less likely to hold stocks, monitor their pension balances, or choose environmentally friendly active retirement planning strategies as a result of their financial disengagement.Green financial participation is more effective in environments with better financial literacy levels or lower informational barriers.Financial market prices and returns do not seem to fully reflect household environmental preferences due to informational hurdles [25].
In addition, this study measures the level of Indonesian MSMEs financial literacy based on the correct answers of eight questions.Based on the data collected, the average correct answers of respondents were 4.71.This means that the MSMEs owners have low financial literacy.Despite lacking fundamental financial understanding, the majority of MSMEs owners interact with sophisticated financial products and make financial decisions for their business.However, the study also demonstrates that financial literacy has been shown to increase with level of education [22], [26].

Conclusion
This study concludes that financial literacy does not significantly affect green investment activities in MSMEs.This happens because MSMEs still need to utilize various financial investment analysis tools.They are still drawing conclusions based on the news/news circulating.In addition, investment decisionmaking also still relies on the instincts of MSMEs owners.Another reason is that MSMEs owners still need to trust or understand the various investment options available.Therefore, they still prefer traditional ways to utilize their excess funds rather than investing.
The second hypothesis is that financial behaviour has a significant positive effect on green investment activities.This means that MSMEs owners think that their financial activities are more important than financial theory or They have exercised tactical control over their financial activities.However, they have yet to make financial planning that will have a long-term impact.
Indonesia still has a long way to go to realize G20 Presidency goals, particularly financial inclusion and sustainable finance.Based on the study's findings, it indicates that the financial literacy of MSMEs is at moderate level.However, because of digital innovation, MSMEs have a tremendous chance to take part in the nation's welfare.Moreover, the environmental impact of MSMEs activities also has to be considered.Therefore, the government needs to have programs in place to increase financial literacy and behaviour among MSMEs to realize the inclusion of MSMEs in economy and ensure that they engage in sustainable business.
For future research, they can increase the number of research samples and/or expand the object of research by adding samples or comparing MSMEs in other cities/regencies in order to provide more comprehensive research results.Whereas the limitations of this study are as follows.First, MSMEs selected as respondents in this study were MSMEs in the category of micro and small businesses in Magelang.The medium business category was not used as a sample because of the limited number of the businesses and the tendency for medium businesses to be feasible and bankable, so there is very little chance of experiencing difficulties in accessing financing sources.Second, respondents in this study were very limited, namely 195 out of a total of more than 11,000 MSMEs spread over twenty-two subdistricts in Magelang City and Regency.