Effects of environmental regulations on innovation and firm competitiveness – A case of small and medium size manufacturing firms in Norway

Abstract

The traditional view of environmental regulations had been that environmental regulation has a negative effect on firms’ innovation and competitiveness. However, this was disputed by Michael Porter in his hypothesis by arguing that environmental regulations can spur innovation that can offset the cost of compliance and thereby make a firm profitable. The study focused on manufacturing SMEs and lagged periods which are two vital areas that have been neglected in the Porter Hypothesis studies. The study used firm level secondary data from Norwegian manufacturing firms to examine the effects of environmental regulations on firm’s innovation activities proxy by number of patents applications, and competitiveness as proxy by profitability and productivity. The study finds negative but significant effects of environmental regulations on firm’s profitability and productivity, and negative but insignificant effects on patents applications. As a result, the study shows that environmental regulations negatively affects firm’s innovations and competitiveness hence Porter Hypothesis is not realized in these SMEs. This could be an indication that these SMEs merely comply with environmental regulation but they do not develop or see any advantages to gain in developing green competencies. Therefore, there is urgent need for the government and all the stakeholders to formulate flexible environmental laws, interventions, incentives and advocacy that could encourage these SMEs to be more innovative, competitive and thereby saving the environment.