Environmental Policy, Innovation and Performance: New Insights on the Porter Hypothesis

TLDR

The Porter Hypothesis has three variants—weak, narrow, and strong—each proposing different relationships between environmental regulation and firm innovation. This study tests the significance of these variants using data on environmental policy, R&D, environmental performance, and commercial performance. The analysis draws on a database of approximately 4,200 facilities in seven OECD countries. Results support the weak variant, provide partial support for the narrow variant, and find no evidence for the strong variant.

Abstract

Jaffe and Palmer (1997) present three distinct variants of the so‐called Porter Hypothesis. The “weak” version of the hypothesis posits that environmental regulation will stimulate environmental innovations. The “narrow” version of the hypothesis asserts that flexible environmental policy regimes give firms greater incentive to innovate than prescriptive regulations, such as technology‐based standards. Finally, the “strong” version posits that properly designed regulation may induce cost‐saving innovation that more than compensates for the cost of compliance. In this paper, we test the significance of these different variants of the Porter Hypothesis using data on the four main elements of the hypothesised causality chain (environmental policy, research and development, environmental performance, and commercial performance). The analysis draws upon a database that includes observations from approximately 4,200 facilities in seven OECD countries. In general, we find strong support for the “weak” version, qualified support for the “narrow” version, but no support for the “strong” version.