The effects of environmental innovations on labor productivity : how does it pay to be green

Abstract

Due to growing environmental concerns, environmental innovations (EIs) have gained prominence in firms’ strategies. This study delves into the productivity effects of regulation-driven environmental innovations using data from four Finnish Community Innovation Survey (CIS) waves. Instrumental variable estimation controls for the endogeneity of voluntary and regulation-driven EIs in a novel way. Our results support the prior findings on the strong Porter hypothesis that environmental regulation improves performance. However, the results also hint at a delay before environmental innovations translate into higher productivity. We also find that regulation-driven EIs improve performance in services. Small firms do not benefit relatively less, although they are inclined to do fewer voluntary EIs. Environmental regulation may favor firms in the Nordic context due to firms being close to the industry frontier.