Digital economy development and firm level sustainability performance in Europe

This study investigates how the digital economy influences firm-level eco-innovation in Europe, using a balanced panel of 4,976 firm-year observations across 17 EU countries from 2016 to 2024. A Principal Component Analysis (PCA)-based Digital Economy Index (DEI) is constructed from four pillars: digital skills, infrastructure, business digitalization, and public services. Employing regression, mediation, and moderation analyses, the results show that stronger national digitalization is positively associated with higher eco-innovation performance. The mediation analysis suggests that this relationship operates not through increased leverage but through reduced dependence on debt, which enhances firms’ financial flexibility and capacity to invest in green innovation. The moderating role of internal digitalization intensity indicates that firms with greater absorptive capabilities derive stronger eco-innovation benefits from digitalization. Heterogeneity tests reveal that high-technology and low-pollution industries exhibit more pronounced effects, whereas pollution-intensive sectors experience weaker associations. Policy implications point to the need for sector-tailored digital–green strategies—combining digital infrastructure and regulatory incentives in pollution-intensive sectors, and emphasizing digital skills and financing mechanisms in high-technology industries. Overall, the study offers new empirical evidence on how digital transformation supports sustainable innovation and advances the EU’s twin digital–green transition agenda.