Smart policy, green innovation: The mediation role of environmental regulation

Abstract

Digitalization has become a key enabler for sustainable transformation, as it increases technological capacity, optimizes resource use and facilitates green innovation. This study examines the link between digitalization, environmental regulations, and green innovation by employing a cross-country panel data set from OECD and World Bank sources for the period 2004–2022. The study uses Structural Equation Modeling to analyze the direct and indirect relationships between digitalization, environmental regulations, and green innovation. Fixed Effects, Panel Corrected Standard Errors and Driscoll-Kraay estimations further validate the robustness of the findings. The results indicate that digitalization is an important key factor of sustainable technological advancement and that it has a significant impact on green innovation. Moreover, the results illustrate that the relationship between digitalization and green innovation is mediated positively by environmental regulations, which underscore that the environmental regulations enhance the impact of digitalization on green innovation. The findings of this study have important policy implications because it shows that to enhance green innovation, environmental policies need to be digitally enabled and incentive based. Future research could build on this analysis by examining sector-specific impacts, other digitalization dimensions, and the influence of institutional factors on sustainable innovation outcomes.