The effects of publicly supported environmental innovations on firm growth in the European Union

Abstract

Environmental innovations are considered to align economic and environmental objectives and support environmental policy goals. To test this notion, we estimate the economic effects of environmental innovations that received public financial support across the business economy of 13 Member States of the European Union. Using an instrumental variable approach to address the inherent endogeneity problem, we find that the average publicly supported environmental innovation increases firm employment by 9%, turnover by 12% and market share by 12% over a two-year period, notwithstanding country and sector heterogeneity. Importantly, the results are not driven by highly innovative firms but stem from a broad set of small and medium-sized enterprises with limited innovation activity. Thus, public financial support for environmental innovations appears to be an effective instrument to facilitate the transition to a more sustainable economy.