Regulation and Firm Perception, Eco-Innovation and Firm Performance

Abstract Purpose - Recent OECD (2010, 2011) reports argue that eco-innovation is the key to realising growth. The purpose of this paper is to analyse the drivers of eco-innovation and to compare the impact of eco-innovation and non-eco-innovation on firm performance. The paper provides insights into the role government regulation can play in directing and stimulating eco-innovation. Design/methodology/approach - The approach utilised by this paper is empirical in nature. A modified innovation production function is used to assess the impact of regulation, consumer expectations and voluntary agreements on the performance of eco-innovation while a knowledge augmented production function is used to assess the impact of eco-innovation on firm performance. Findings - The findings suggest that regulation and customer perception can explain a firm‟s decision to engage in eco-innovation. Eco-innovation is also found to be more important than non-eco-innovation in determining firm performance. Research limitations/implications - Due to the limited availability of accounting data this paper uses turnover per worker as the measure of firm performance. As a result it is not possible to assess the impact of eco-innovation on firm costs. Social implications - The finding that regulation drives eco-innovation and that there is no trade-off between the optimal outcomes of lower levels of pollution for society and higher profit margins for businesses suggests that regulators and policy makers can stimulate growth and create a greener society. Originality/value - This paper provides an empirical analysis of the Porter and van der Linde‟s (1995) theory of environmental regulation and firm performance using novel real world data from over 2,000 Irish businesses.