Environmental Regulation and Innovation: A Panel Data Study

In a 1991 essay in Scientific American, Michael Porter suggested that environmental regulation may have a positive effect on the performance of domestic firms relative to their foreign competitors, by stimulating domestic innovation. We examine the stylized facts regarding environmental expenditures and innovation in a panel of manufacturing industries. We find that lagged environmental compliance expenditures have significant positive effect on R&D expenditures when we control for unobserved industry-specific effects. We find little evidence, however, that industries' inventive output (as measured by patent applications) is related to compliance costs).