Unmasking the Porter Hypothesis: Environmental Innovations and Firm-Profitability

28 Pages Posted: 16 Jun 2011  

Christian Rammer

Centre for European Economic Research (ZEW) - Industrial Economics and International Management Research

Sascha Rexhauser

Centre for European Economic Research (ZEW)

Date Written: June 1, 2011

Abstract

We examine impacts of different types of environmental innovations on firm profits. Following Porter’s (1991) hypothesis that environmental regulation can improve firms’ competitiveness we distinguish regulation induced and voluntary environmental innovations. We find that innovations which reduce environmental externalities reduce firms’ profits, as long as they are induced by regulations. However, innovation that increases a firm’s material or energy efficiency in terms of material or energy consumption has a positive impact on profitability. This positive result holds both for regulation induced and voluntary innovations, although the effect is significantly larger for regulation-driven innovation. We conclude that the Porter hypothesis does not hold in general for its strong version but has to be qualified by the type of environmental innovation. Our finding rest on firm level data from the German part of the Community Innovation Survey in 2009.

Keywords: Environmental innovation, environmental regulation, Porter hypothesis, competitiveness

JEL Classification: Q55, Q58

Suggested Citation

Rammer, Christian and Rexhauser, Sascha, Unmasking the Porter Hypothesis: Environmental Innovations and Firm-Profitability (June 1, 2011). ZEW - Centre for European Economic Research Discussion Paper No. 11-036. Available at SSRN: https://ssrn.com/abstract=1865249 or http://dx.doi.org/10.2139/ssrn.1865249

Christian Rammer (Contact Author)

Centre for European Economic Research (ZEW) - Industrial Economics and International Management Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

Sascha Rexhauser

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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