Enabling green innovations for the circular economy: What factors matter?

September 28, 2022

Sustainability, Vol. 14, No. 19, 2022

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Recent economic theory and international evidence have established that innovations with environmental benefits (green innovations) are crucially important to increase resource efficiency and accelerate the transition to a circular economy. However, robust empirical evidence on what factors drive green innovations at firm-level is limited and inconclusive. To help fill this evidence gap, we designed and used a unified econometric framework to quantify the impact of a comprehensive set of factors on the propensity of firms to introduce innovations with environmental benefits. Such factors include environmental regulations, innovation-inputs, firm-specific characteristics, spillovers from other green innovators, public funding, and co-operation for innovation activities. We distinguished and examined innovations with environmental benefits obtained within the firm and innovations with environmental benefits obtained during the consumption of goods or services by the end user. In addition to average effects across all firms, we also uncovered specific effects for different groups of firms and industries. The results indicate that environmental regulations, in-house R&D, and acquisition of capital assets are important factors that enable firms to introduce green innovations. These results have implications for designing policies aiming at enabling more firms to introduce green innovations and thus accelerate the transition to a circular economy and a more sustainable long-term growth.