Legal Origins and Environmental Innovation: How Institutional Quality Shapes Firm Eco‐Innovation in G20 Economies

Abstract

This study examines how national institutional quality shapes firm‐level environmental innovation across 19 G20 economies. Using 34,135 firm‐year observations from 2808 listed firms over 2005–2023, drawn from LSEG/Refinitiv and the World Bank Worldwide Governance Indicators, we estimate pooled OLS, fixed‐effects, random‐effects, Tobit, bootstrap, and dynamic system‐GMM models. We focus on three distinct governance dimensions: rule of law, regulatory quality, and government effectiveness and ask whether internal sustainability governance conditions their effects. All three are positively and significantly associated with environmental innovation, with government effectiveness the strongest and most robust across every specification, including a Tobit model that accounts for nondisclosing firms and a dynamic model whose long‐run estimate closely matches the baseline. Because the institutional measures vary at the country–year level, we interpret the findings as associational rather than causal. Evidence on CSR/sustainability committees points to complementarity: committees are strongly associated with higher environmental innovation and amplify the effects of rule of law and government effectiveness, with a positive but nonsignificant interaction for regulatory quality. An exploratory split by legal origin shows larger coefficients in common‐law countries, which we offer as a direction for future research. These findings imply that strengthening administrative implementation capacity—not regulatory design alone—may be the most effective lever for advancing corporate environmental innovation, with implications for policymakers, boards, and investors interpreting environmental performance across diverse institutional settings.