Driving circular economy transformation through technological innovation: the moderating role of regulatory environment, human capital, and technological capacity

Abstract

Addressing the urgent issues of climate change, resource scarcity, and environmental deterioration necessitates a shift toward a circular economy. However, there is a lack of research on the circumstances under which technological advancements influence the circular economy. This study explores the connection between technological innovation and the circular economy in the context of OECD economies, emphasizing the moderating effects of regulatory environment, human capital, and technological capacity. Utilizing the endogenous growth theory, we develop and evaluate a model using annual data from 37 OECD countries comprising 692 country-year observations from 2000 to 2022. Employing a panel fixed-effects regression model with Driscoll-Kraay standard errors, instrumental variable estimation, and quantile regression, our findings based on the instrumental variable model indicate that technological innovation is positively and significantly associated with the circular economy indicator, indicating deteriorating circular performance as patenting activities increase. Although the quadratic term is negative and statistically significant, the marginal effects remain positive across the observed range, revealing a concave relationship in which the adverse environmental effects of technological innovation persist but diminish in magnitude at higher levels of technological innovation. The results further show that technological capacity positively moderates the relationship between technological innovation and the circular economy, whereas human capital has a negative moderating effect. Finally, environmental regulation strengthens the positive impact of technological innovation on a circular economy. The findings differ across the fixed effects and quantile regression models, highlighting the context-specific nature of the results and the importance of addressing endogeneity and distributional effects. Our results contribute to the theoretical understanding of the interplay between technological innovation and the circular economy, underscoring the significance of contextual factors. Practical implications for policymakers and businesses include prioritizing funding programs and incentives for sustainable technologies, monitoring innovation efforts, and creating a supportive regulatory landscape that encourages circular economy practices, while minimizing bureaucratic barriers.