Comparing public and private R&D: implications for environmental sustainability in G7 economies

Abstract Economic activity has contributed to a wide range of environmental challenges, increasing the importance of research and development (R&D) as a means of supporting sustainable development. Although the environmental implications of R&D have been widely examined, relatively little attention has been paid to the potentially different roles of public and private R&D. Given that these two forms of R&D differ in their objectives, funding structures, and innovation processes, distinguishing between them may provide a more nuanced understanding of their environmental effects. Against this background, this study examines the environmental impacts of public and private R&D expenditures in the G7 countries over the period 1985-2021 using panel data techniques. The findings from the Driscoll and Kraay (1998) estimator and the Beck and Katz PCSE estimator indicate that both public and private R&D expenditures contribute positively to environmental sustainability. The estimated coefficients are larger for private-sector R&D, suggesting a relatively greater contribution compared with public-sector R&D. Furthermore, the Dumitrescu and Hurlin (2012) panel causality test indicates a unidirectional causal relationship running from private R&D expenditures to environmental quality, whereas a bidirectional causal relationship is identified between public R&D expenditures and environmental quality. Overall, the findings suggest that strengthening private-sector innovation, while maintaining support for public R&D, may enhance environmental sustainability in advanced economies.