Environmental regulation and eco-innovation: the Porter hypothesis

The paper analyses the relationship between environmental regulation and eco-innovation. The relationship is tested using a German firm-based panel and a dynamic 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 eco-innovations and self-commitment. The heterogeneity of firms is controlled for using R&D intensity, the size, the sector and the region of the company, 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 eco-innovation. Comparing a static model to a dynamic one shows that only long term objectives and market incentives are positively associated with eco-innovation. Conventional regulatory tools, namely legally binding instruments, are not effective for triggering innovative behaviour at the firm level. The results do not allow to confirm the Porter hypothesis but rather offer a refined version, emphasizing the nuances that apply to the concept of "regulation". The claim is that what matters is not the type of the policy instrument but rather the perception of the instrument by firms