Green innovation in Norwegian firms: Navigating the complexity of productivity and performance

In an era where sustainability demands are increasing, green innovation (GI) is garnering widespread acclaim for its profound social and environmental benefits. This study explores how GI affects productivity and efficiency in Norwegian service and manufacturing firms, using a state-of-the-art stochastic frontier model (semi-parametric smooth coefficient) tailored to analyze firm-specific impacts essential for competitiveness in a green economy. We identify two main pathways through which GI affects productivity: technological heterogeneity and shifts in inefficiency. The impact on technology is split into neutral (direct) and non- neutral (indirect) effects, with the neutral effect being independent of factor inputs, and the non-neutral effect being influenced by both technology heterogeneity and input levels. We evaluate the marginal effects of GI on productivity through technology and inefficiency. Our GI construct includes innovations such as reduced material/energy use, lower CO2 emissions, noise reduction, hazardous material substitution, and adoption of renewable energy. Analyzing data from 3,130 Norwegian firms, our findings highlight the crucial role of GI in sustainability, underscoring its strategic importance across sectors. We find a positive neutral pathway effect but negatively impacts productivity through non-neutral pathways. GI also positively influences inefficiency, particularly in manufacturing.