The Sustainability Paradox: How Economic Ecosystems and Institutional Quality Shape Innovation Pathways to Environmental Sustainability

ABSTRACT Joint levers for green growth in emerging economies, specifically innovation, finance, institutional quality, and openness are widely emphasized, yet their combined environmental consequences remain insufficiently understood, particularly when potential nonlinear dynamics are taken into account. This study examines how research and development, foreign direct investment, trade openness, financial development, gross capital formation, and institutional quality shape CO 2 emissions in a panel of 20 emerging economies using generalized additive models that flexibly recover smooth marginal and interaction effects. The results reveal strongly nonlinear and regime‐dependent relationships, including an innovation‐based inverted‐U for R&D, a U‐shaped profile for FDI, and predominantly emission‐increasing trade effects, alongside complex roles for finance, capital formation, and governance. Interactions show that the environmental consequences of R&D are critically conditioned by trade and FDI. The analysis highlights that innovation is not intrinsically green; its climate impact depends on the surrounding financial, institutional, and openness architecture.