The Porter Hypothesis at 20:Overview of the Literature

Stefan AmbecToulouse School of Economics & Univ. Gothenberg

Mark A. CohenRFF & Vanderbilt Univ.

Stewart ElgieSustainable Prosperity & Univ. of Ottawa

Paul LanoieHEC Montreal

Outline

1. What the Porter Hypothesis Does and Does Not Say

2. Developments in Theory

3. The Empirical Evidence

4. Design of Policies to Enhance Competitiveness

5. The Forward Research Agenda

What is the Porter Hypothesis?

Strict but Flexible

Environmental Regulations

(market-based)

InnovationBusiness

Performance (sometimes)

Environmental Performance

Why “properly crafted” regulation might lead to + outcomes…

1. Signal to companies about resource inefficiencies & potential technological improvements

2. Raise corporate awareness on topics that might otherwise be ‘lost’ in shuffle

3. Reduce uncertainty of investments in environmental protection

4. Creates pressures that motivate innovation and progress

5. Levels the transitional playing field

Two Important Notes…

Criticism of Porter Hypothesis 1. Assumes firms aren’t always profit maximizing.2. If there is low hanging fruit, why don’t firms know

about it?

What Porter did NOT Say…1. Did not say “all regulation leads to innovation…”

=> Only that “well designed regulation does…”

2. Did not say, “innovation always offsets cost of regulation”

=> He did say that it “often does…”

Developments in Theory

1. Firms do not profit maximize Risk averse managers Bounded rationality Present-biased decision makers Information Asymmetry : owner versus

manager

2. Market Failure Imperfect competition R&D spillovers

Empirical Evidence

1. Weak Version => Regulation-Innovation Patents R&D investment, technological choice,

age of assets

Yes, generally positive and significant , but often weak

Empirical Evidence

2. Strong Version => Firm Productivity Cost functions, factor productivity,

profits, ROI, Tobin’s Q Plant location/pollution haven

hypothesis

Mixed negative and positive results, usually weak.

A sample study from OECD survey on 4000 production plants

EnvironmentalPolicy Environmental

R&D

EnvironmentalPerformance

BusinessPerformance

(-)

(+)

(+)

(+)

Policies to Enhance Competitiveness

1. Environmental Policies Performance-based standards Market-based instruments

- Questions about revenue recycling

2. Industrial & Patent Policies Patent policy might enhance R&D

Policies to Enhance Competitiveness

3. Training Especially in SME & developing

countries

4. Organizational & Governance Conditions Is this solely purview of private

companies? Transparency: CDP, GRI Makeup & Role of Board of Directors

Research Agenda Going Forward

First and Foremost: Are the Policy Implications Empirically-based?

Areas we’ve tentatively identified: Data & Methodological IssuesNon-Regulatory PoliciesLongitudinal StudiesGlobal Studies

Research Agenda Going Forward

Data & Methodological Issues Proxies instead of actual measures of

innovation, productivity, competitiveness Lack of comparable industries, time,

variables

How do Non-regulatory Policies Interact? Voluntary programs Mandatory Disclosure programs

Research Agenda Going Forward

Longitudinal Studies Only a few studies have even lagged key

variables Has the world changed?

Global Studies Pollution haven hypothesis studies have not

distinguished type of regulation More comparable data opens opportunities

for research

Goal of Today’s Workshop

Assess What is Known=> Innovation=> Competitiveness=> What are key policy implications?

Assess What is NOT Known=> Prioritize main research questions

Questions?