According to the Porter hypothesis, strict environmental regulations can induce efficiency and encourage innovations that help improve commercial competitiveness. The hypothesis was formulated by the economist Michael Porter in an article in 1991.
The hypothesis suggests that strict environmental regulation triggers the discovery and introduction of cleaner technologies and environmental improvements, the innovation effect, making production processes and products more efficient. The cost savings that can be achieved are sufficient to overcompensate for both the compliance costs directly attributed to new regulations and the innovation costs.
In the first mover advantage, a company is able to exploit innovation by learning curve effects or patenting and attains a dominating competitive position compared to companies in countries where environmental regulations were enforced much later.
The Porter hypothesis has been applied to REACH. In one conclusion, companies that adopt a cost leadership business strategy and have a relatively small product portfolio will fare better than companies that compete by product differentiation and have a larger number of chemicals that require regulation.
Various studies found that stricter environmental regulation stimulates innovation ("weak" version of Porter hypothesis). There is mixed evidence whether stricter regulation enhances business performance ("strong" version). Whether the type of regulation - market-based approaches or requirements and prohibitions - has an impact, is an open question. Economic theory suggests that market based instruments could be more efficient but there is mixed empirical evidence. A study of OECD countries, however, showed no evidence of permanent effects of environmental policy tightening on productivity following the introduction of environmental measures, regardless of the type of regulation.
References
- America’s Green Strategy, Michael Porter, 1991. Scientific American 264: 168.
- The Porter Hypothesis Revisited. A Literature Review of Theoretical Model and Empirical Test., Marcus Wagner, Lüneburg: Centre for Sustainability Management, 2003 open access publication
- Chemicals Regulation and the Porter Hypothesis: A Critical Review of the New European Chemicals Regulation, Torsten Frohwein, Bernd Hansjürgens, Journal of Business Chemistry January, 2005 open access publication
- The Porter Hypothesis at 20. Can Environmental Regulation Enhance Innovation and Competitiveness?, Stefan Ambec, Mark A. Cohen, Stewart Elgie, and Paul Lanoie. RFF DP 11-01, January 2011 open access publication
- Ibid.
- Do Environmental Policies Matter for Productivity Growth? Insights from New Cross-Country Measures of Environmental Policies, Silvia Albrizio, Enrico Botta, Tomasz Koźluk, Vera Zipperer. OECD Economics Department Working Papers 1176, OECD Publishing, 2014 ().
Further reading
- Michael E. Porter and Claas van der Linde, "Toward a New Conception of the Environment-Competitiveness Relationship," Journal of Economic Perspectives, Vol. 9, No. 4 (Autumn, 1995), pp. 97–118 (JSTOR).
- Michael E. Porter and Claas van der Linde, "Green and Competitive" Harvard Business Review (Sept-October 1995), p 120–134.
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