The impact of environmental regulation on innovation and international competitiveness

Abstract

The purpose of this paper is to analyze the impact of environmental regulation on innovation and international competitiveness. We test the weak, narrow, and strong versions of Porter's hypotheses by looking at the impact of environmental regulation on exports both directly and indirectly through innovation and by introducing the role of pollution intensity in moderating the impact of stringent regulation on innovation and international competitiveness. Green policies are measured with the OECD Environmental Stringency Policy Index, distinguishing between market, non-market instruments, and technology support policies. Differently from previous papers, we adopt the technology gap approach to trade, which is suitable for relating environmental regulation to trade competitiveness and we apply the simultaneous-equation system econometric model with a moderating factor represented by pollution intensity. The results support the weak and strong versions of Porter’s hypotheses and find that the positive impact of regulation on innovation and exports increases with a country’s pollution intensity, suggesting that green policies, if properly coordinated, can represent a win–win strategy, fostering, at the same time, sustainability and international competitiveness.