Relating economic openness and export diversification to eco‐efficiency: Is green innovation critical?

A critical debate on whether macro economies would achieve sustainability targets via green innovations could reach some informed consensus, given it is explicit how those innovations, directly and indirectly, interact with both economic and ecological systems through international economic activities. To unriddle this puzzle, this work is the initial attempt to examine how green innovation moderates the influence of economic openness and export diversification on eco‐efficiency in selected 13 European Union (EU) economies from 1995 to 2014. We employ advanced second‐generation econometric approaches robust to cross‐section dependence, slope heterogeneity, and the omitted variable bias concerns in panel data. The main results are firstly, economic openness and export diversification tend to deteriorate eco‐efficiency in the absence of a green innovation moderator. Secondly, in green innovation moderation models, both economic openness and export diversification are likely to improve eco‐efficiency. Thirdly, green innovation not only directly promotes eco‐efficiency but also positively moderates the influence of economic openness and export diversification on eco‐efficiency. Fourthly, a one‐way causality exists from green innovation moderators to eco‐efficiency, while economic openness, export diversification, green innovation, and other control variables establish a two‐way causal relationship with eco‐efficiency. Finally, for green innovation in place, the policy shocks of economic openness and export diversification are predicted to achieve the eco‐efficiency effects in more than 1 year in the EU members, while green innovation catalyses this convergence speed. Besides, economic openness and export diversification policies should be integrated with the green innovation framework to achieve eco‐efficiency for sustainable development