Transition to Green Industry and Recycling in a Heterogeneous-Industry and Endogenous Growth Model

Riku Watanabe

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: This study incorporates two heterogeneous industries into an endogenous growth model within the framework of a circular economy. In the model, industries are classified as either brown or green, and each can transition between states through R&D activities related to innovation and greening. Greening R&D is conducted exclusively by firms in the brown industry and enables the transition to the green industry. We analyze the effects of subsidies for greening R&D and show that such subsidies increases labor allocation to both innovation and greening R&D. As a result, the model yields win-win outcome: economic growth is promoted not only by productivity-driven growth acceleration but also by a decline in the share of brown industries that rely on exhaustible resources, which mitigates the negative impact of resource depletion on growth. These findings suggest that advancing a circular economy can be compatible with sustained economic growth.

Date: 2025-05, Revised 2025-08
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