Green Regions, Smarter Firms: How Environmental Investments Drive Innovation in Germany

Can environmental investments fuel business innovation? A recent study from Germany suggests they can—but the relationship is more nuanced than it seems. Using data from more than 63,000 firms across Germany between 2009 and 2017, Temouri et al. (2025) explore how regional environmental protection investments (EPIs) and the presence of business clusters shape firm-level innovation. Their analysis centers on two critical drivers: public investment in environmental initiatives at the regional level and business clusters—geographically concentrated networks of interconnected firms within related industries. These clusters are widely recognized for promoting innovation by enabling knowledge sharing, collaboration, and access to shared resources and infrastructure.