Environmental regulation and eco-innovation: the Porter Hypothesis

The paper analyses the relationship between environmental regulation and environmental innovation with insights from the diffusion of innovations theory. The analysis is based on three theoretical approaches: neoclassical, evolutionary and induced innovation. The relationship is tested using a German firm-based panel and a count data model estimating the propensity of firms to innovate in response to five initiating factors, namely the fulfillment of existing legal requirements, expectations towards future legal requirements, financial incentives, demand for environmental innovations and self-commitment. The relevance of the interactions between policy instruments as well as the influence of internal factors and path dependency is also tested. In addition, R&D intensity, the region, the sector of the company are controlled for and a filter for companies that account for their environmental impact is applied. The results answer the central question concerning the design of environmental policies in order to foster innovation. Comparing a static model to a dynamic one shows that only long term objectives and market incentives are positively associated with environmental innovation. Conventional regulatory tools, namely legally binding instruments, are not effective for triggering innovative behaviour at the firm level. Lastly, the results show that the threat of future environmental regulation is a necessary condition for self-regulation. The results do not allow to confirm the Porter hypothesis but rather offer a refined version, emphasizing the nuances that apply to the conception of "regulation". In addition to the fact that not all types of regulation trigger eco-innovation, the results show that although necessary, environmental regulation is certainly not a sufficient condition for eco-innovation.