ENVIRONMENTAL POLICY, INNOVATION AND PERFORMANCE: NEW INSIGHTS ON THE PORTER HYPOTHESIS

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.