Eco-innovation and green growth: The income inequality trap

In the growing discourse on sustainability, eco-innovation (EI) is increasingly viewed as a key driver of green growth. At the same time, income distribution and green growth are central to achieving the Sustainable Development Goals (SDGs). However, limited attention has been given to how income inequality moderates the relationship between EI and green growth. Relying on panel data of 108 countries from 1990 to 2024, this study contributes to the literature by constructing a comprehensive green growth index to estimate both the unconditional and conditional effects of EI on green growth. The empirical results, derived from the two-step system GMM estimator, show that while EI consistently contributes to green growth, income inequality hinders it. Additionally, the study finds that income inequality is a negative moderator in the relationship between EI and green growth. This negative total effect is particularly pronounced at higher levels of income inequality. These results are also robust to different panel estimation techniques and sub-samples of countries, including panel quantile regression and splitting countries by income groups (higher income and upper-and-lower-middle-income groups). More precisely, EI leads to a rise in green growth in higher-income economies while it shows an insignificant result for upper-and-lower-middle-income economies due to weak innovation systems and institutions. The empirical results highlight that EI alone is insufficient for promoting green growth; thus, reducing income inequality is essential to fully leverage its benefits. Policymakers and countries are encouraged to adopt integrated approaches that promote both higher EI usage and equitable income distribution to achieve sustainable green growth.