Enhancing Sustainability: The Impact of Research and Development Expenditure on Future Environmental Innovation in European Firms

Sustainability is key to our collective future, and environmental innovation is essential in integrating sustainability within organizations. Relatedly, theoretical insights from the resource-based view of the firm suggest that Research and Development (R&D) focused on environmental innovation is a key enabler of the development of unique knowledge-based assets. In this study, we integrate these insights to develop a hypothesis which predicts that current-period R&D expenditure is a significant driver of future environmental innovation. We test this prediction using a database comprising firms from eight European countries over the period 2003–2020. Our empirical findings, utilizing a random-effects estimation model employing controls for heterogeneity across firms, time, and countries, offers strong empirical support for this hypothesis and are strongly robust to alternative estimation methodologies. Furthermore, building on the absorptive capacity literature, we hypothesize and demonstrate that firm age positively moderates this relationship, indicating that experienced firms leverage R&D more effectively for future environmental innovation. Conversely, we hypothesize and demonstrate that relative R&D investment (measured using the R&D expenditure to capital expenditure ratio) negatively moderates the R&D–environmental-innovation relationship, highlighting the risk of R&D overinvestment in this domain. Our findings offer unique insights for C-level executives, policymakers, and researchers, demonstrating that while R&D is a key driver of future environmental innovation, its effectiveness is enhanced by firm experience, but can also be diminished by excessive R&D investment.