Innovation and water productivity: Empirical evidence from water-related patents

This paper investigates the impact of innovation in the water sector on water productivity using a global sample of 81 countries from 2000 to 2019. We derive theoretical parameters in the Cobb-Douglas production framework and estimate these parameters using fixed-effects panel instrumental variable and system generalized method of moments estimations. Contrary to theoretical predictions, we find that water-related innovation has a significant negative effect on water productivity. This suggests the presence of a productivity paradox in the water sector. In our analysis, this paradox is consistent across various modeling specifications and alternative estimations, marking a unique phenomenon not previously observed outside the information and communication technologies sector. Furthermore, the paradox is more pronounced in countries of the global north compared with those in the global south, a divergence we attribute to differences in economic structures, technological capabilities, and resource allocations. These findings underscore the complexity of the role water-related innovation plays in water productivity and highlight the need for tailored approaches to address region-specific challenges.