Eco‐Innovation as a Driver of Economic Complexity and Productive Capacity in the European Union: A Pathway to Sustainable Development

ABSTRACT Following the dearth of empirical evidence on eco‐innovation as a driver of economic complexity and productive capacity, we studied a panel of 22 European countries from 2013 to 2022 using the system GMM estimator and other alternative panel estimators (including the dynamic bias‐corrected LSDV, the Prais‐Winsten, the Fixed‐effects with Driscoll‐Kraay Standard Errors, and the robust Pooled OLS estimators). Intriguingly, we find that eco‐innovation significantly enhances economic complexity in Europe, but hampers productive capacity in the region. We also find that other potent drivers of economic complexity and productive capacity are research and development, foreign direct investment, and per capita income, while institutional quality failed to significantly moderate and enhance the effect of eco‐innovation. We made important policy recommendations, which among others, encouraged governments in the region to harmonize and strengthen the synergy between their energy transition policies and eco‐innovation practices as a pathway to sustainable development.