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Impact of eco-innovation on firms competitiveness. An empirical study based on Mannheim Innovation Panel


par Abdelfettah BITAT
College of Europe - Master of Art 2012
Dans la categorie: Commerce et Marketing
   
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COLLEGE OF EUROPE BRUGES CAMPUS European Economic Studies

Impact of Eco-innovation on firms'

competitiveness

An Empirical study based on Mannheim

Innovation Panel

Thesis presented by Abdelfettah BITAT

Supervisor: Klaus RENNINGS

for the

Degree of Master of Arts in European Economic Studies Specialisation: European Economic Integration and Business

Statutory Declaration

I hereby declare that this thesis has been written by myself without any external unauthorised help, that it has been neither presented to any institution for evaluation nor previously published in its entirety or in parts. Any parts, words or ideas, of the thesis, however limited, and including tables, graphs, maps etc., which are quoted from or based on other sources, have been acknowledged as such without exception.

Moreover, I have also taken note and accepted the College rules with regard to plagiarism (Section 4.2 of the College study regulations).

<10 120 word>

Abstract

Environmental issues have become of prime importance nowadays so that they are a recurrent subject at the table of the world's most powerful committees. Hence, the relationship between environmental regulation, eco-innovation and firms' competitiveness has always been equivocal. The concerned groups of interest all claim to have the right argument without a clear analytical proof. The present thesis will shed some light on one of the most controversial hypothesis in the last couple of decades: the Porter Hypothesis. In fact, Harvard Business School Professor Michael E. Porter wrote a one page article in the beginning of 1990s claiming, against the current trend in that time, that environmental regulation will actually trigger eco-innovation (weak Porter hypothesis) which will in turn increase the competitiveness of businesses (strong Porter hypothesis). Needless to say this argument has been immediately captured by politician and environmentalists to support stringent environmental regulation. At the same time several counter-articles were published to refute the Porter Hypothesis claiming metaphorically that there is no 10 dollars bill on the ground because if it was there it would have been already picked up, referring to the idea that businesses would not miss an opportunity to improve their competitiveness on the basis of profit maximising paradigm. The current thesis will limit itself to the empirical test of the strong Porter Hypothesis explaining the relationship between eco-innovation and firms' competitiveness using Mannheim Innovation Panel (MIP) part of the European Community Innovation Survey. The Ordered Probit Model will test six different hypotheses to compare between eco-innovative and non-innovative firms concerning the impact of each of access to green market, environmentally friendly products differentiation, eco-innovation technological rent, materials and energy efficiency, cost of capital and labour productivity variables on the return on sales as an index of competitiveness. The thesis is structured as follow: After the introduction, section 2 will briefly define eco-innovation and its drivers and expose more extensively a literature review on the Porter hypothesis, section 3 will setup the theoretical foundations for each of the six hypotheses, while section 4 and 5 will describe and test the empirical model respectively. The empirical results confirmed only partly the strong Porter hypothesis with an overall positive effect of environmental innovation on return on sales whereas from the six different sub-hypotheses only four were verified leading to a rejection of the remaining ones, namely the green products differentiation and patent stock.

Keywords

Eco-innovation

Porter hypothesis Competitiveness Environment

Ordered Probit Model

Table of Contents

Statutory Declaration ii

Abstract iii

Keywords iv

List of Tables vii

List of Figures viii

List of Abbreviations ix

1 Introduction 1

2 Literature review of the academic background 4

2.1 Introduction 4

2.2 Eco-innovation 4

2.2.1 Definition 4

2.2.2 Determinant for eco-innovation 5

2.3 The Porter hypothesis 6

2.3.1 The weak Porter hypothesis 7

2.3.2 The strong Porter Hypothesis 8

2.3.3 Critics of the Porter hypothesis 12

2.4 Conclusion 14

3 Hypotheses of the theoretical model 16

3.1 Better access to markets 16

3.2 Product differentiation 16

3.3 Technological rent 17

3.4 Cost of materials and energy 18

3.5 Cost of capital 18

3.6 Cost of labour 19

4 Empirical setting 21

4.1 Data description 21

4.2 Variable definitions 22

5 Empirical estimation 26

5.1 Estimation model 26

5.2 Empirical results 27

5.3 Model discussion 27

6 Conclusion 29

Bibliography 31

ANNEX I 35

ANNEX II 38

List of Tables

Dimensions of Environmental Innovation Distinguished in MIP 2009 ...4

Variables definition 26

Probit Estimation 28

List of Figures

Spill-over effect of innovation 11

Schematic representation of the Porter hypothesis 12

List of Abbreviations

CIS Community Innovation Survey

ER Environmental Regulation

EU European Union

MIP Mannheim Innovation Panel

OECD Organisation for Economic Co-Operation and Development

PH Porter Hypothesis

R&D Research and Development

US United States of America

1 Introduction

Environmental issues are at the core of most of the economic and political debates nowadays. The problem is so important that it has become a recurrent subject of most of the world's top level committees such as the G8. The current economic context has also brought to the table the discussion about the competitiveness of the developed economies, with the businesses at their core, and how governments may revive the comparative advantage of their countries through well-designed regulation. All in all, one can notice that all of these three aspects are linked one another in a certain way. Intuitively, the starting point would be that the governments would intervene via the regulation in order to reduce the environmental externalities, but the matter of businesses' competitiveness is not less of importance in the point of view of politicians seeking democratic legitimacy. Moreover, the classical economic mind-set of the market economies is that the government shall not intervene in the private economic field unless the intervention is justified by a market failure or for redistributional purpose. Interestingly enough, Professor Michael E. Porter came, at the beginning of the 1990s, with a revolutionary idea defying all preconceptions: `Environmental regulation will trigger innovation and thus increase the competitiveness of businesses.' The idea was absolutely astonishing for economists at that time and the politicians took immediately this hypothesis as a chief argument to support more Environmental Regulation (ER). Porter argued that even if the impact of stringent ER might be «challenging for the national industry at the very beginning», the long run result would be an enhanced competitive position at the global level for innovative business developing new environmental technologies to improve their products and processes (Blind, 2011). The Porter Hypothesis quickly became a counterhypothesis to the existing paradigm which stipulates the ER will necessarily impact negatively the business competitiveness as it bound the innovative projects of the firms to a limited scope of activities, in this case environmental issues, and thus, will only lead to supplementary costs.

Consequently, during the last two decades a vivid debate has been raised opposing the two different perspectives. On one hand, the ground-breaking view correlating ER is with enhanced competitiveness rather than the traditional view of an adverse effect as a result of additional costs imposed to the businesses, on the other hand. Many managers and analysts have begun to convey the idea that it is imperative for companies to financially care about the environment (Lanoie and Laplante, 1992), either to protect their reputation or improve their access to capital markets. Beyond these indirect effects, a growing number of examples

started to show that certain activities related to environmental management can have a direct positive effect on the financial situation of companies. In other words, some activities may be cost effective and bring a "green return" while helping to protect the environment at the same time.

In light of the preceding arguments, the objective of this thesis is as simple as humble. Instead of analysing the Porter hypothesis as a whole, the investigation will be limited only to the second part of the effect. To put it differently, the hypothesis will be dismantled into two chains: the first one is how ER may trigger eco-innovation and the second one is how eco-innovation may improve firms' competitiveness. In this context, the main problematic of current thesis will be:

Does eco-innovation impact positively the firms' competitiveness?

To investigate this central problematic, several sub-questions will be tackled in order to better understand how eco-innovative firms may outperformer their non-innovative competitors. The following sub-questions will be then addressed:

Do eco-innovative firms have access to more markets than their competitors?

Does green product differentiation explain a higher return for firms investing in ecoinnovation?

Do they benefit from innovation by trading their new technologies in the environmental innovation market?

Is the cost efficiency for materials and energy at the origin of their competitive advantage? Do they have access to lower capital cost?

Do they enjoy a higher labour productivity?

As an a priori answer to the central questions, the following general hypothesis will be formulated:

Eco-innovation does have a positive return on the competitiveness of the companies. Following the same logic, the six sub-hypothesis are:

Eco-innovative firms have access to green markets compared to their competitors. By differentiating their green products firms may apply a higher mark-up.

The patent stock of green technologies represents a rent for eco-innovative firms. Product and process eco-innovation diminish wasted inputs and increase efficiency. Shareholders value the environmental implication of the firms.

Thanks to a better commitment of the employees to the company's value, the eco-innovative firm's labour-productivity is higher than its competitors, ceteris paribus.

The methodology used to explore this subject is descriptive and analytical with a literature review of some of the most important empirical and academic works in the field. The test of the PH will be conducted via an empirical model based on innovation data of German companies from the Mannheim Innovation Panel, with an ordinal limited dependant variable model, more precisely an Ordered Probit Model ideal for data collected via surveys.1

Following the present introduction, section 2 will, after a brief definition eco-innovation and its determinants, summarise the results of some key empirical paper written by economic academia to either confirm or refute the PH. Section 3 will setup the theoretical foundations for each of the six hypotheses. Section 4 will present the dataset and define the variables used for the empirical model. In section 5, the steps of the model building will be exposed together with the empirical results and their discussion. Finally, the conclusion will comprise a summary recalling the main results of the thesis.

1 In this context I would like to thank very much my academic supervisor Professor Klaus Rennings and my analytical supervisor Professor Christian Rammer for all their valuable advice, their helpful assistance and especially for giving me the opportunity to visit the ZEW and have access to the Mannheim Innovation Panel (2009) without which the current thesis could not have been conducted. Not to mention Professor Eric De Souza for his econometric assistance and his availability.

2 Literature review of the academic background

2.1 Introduction

In the following section the key concepts for a thorough understanding of the subject of the present thesis will be exposed. It will start with a relatively short definition of ecoinnovation from three different perspectives, followed by a discussion of the drivers of innovation in general and eco-innovation in particular. Right after, the Porter Hypothesis (PH) will be introduced. In order to have a better focus on the object of the thesis, the PH will be dismantled, according to a common methodology in the literature, into two main hypotheses: The `weak' PH and the `strong' PH. The former is often, in its turn, decomposed into two hypotheses including a `narrow' one. Since the main problematic is about the strong PH, a particular attention will be given to this part with arguments for and against as well as an objective critic of the PH as a whole.

2.2 Eco-innovation

2.2.1 Definition

Klemmer (1999) defined eco-innovations as all the «techno-economic, organisational, social and institutional changes leading to an improved quality of the environment». He made a clear distinction in his article between end-of-pipe and integrated production techniques which may concern either product or process innovation (Rennings, 2000). The conventional comprehension of product innovations is, as articulated in the Manual of Oslo (OECD/EUROSTAT, 2005), the innovation that may lead to novel products or enhanced ones. Nevertheless, the scope of product eco-innovation includes the application of known technologies for new utilisations or the investment in new technologies in order to enhance current products with improved environmental impact, for example products that need fewer inputs. Thus, the main difference between environmental and conventional product innovation is that the former abates the environmental problems. It is important to note that sometimes businesses achieve product eco-innovations even without a clear purpose of preventing environmental externalities. Consequently, product eco-innovation is, before anything else, a wise business decision that associates cost cutting strategy with environmental benefits (Triebswetter & Wackerbauer, 2008).

Kemp and Pearson (2008) suggested a more exhaustive definition of eco-innovation with three main characteristics, namely the novelty, the aim and the state of art compared to alternatives:

«Eco-innovation is the production, application or exploitation of a good, service, production process, organizational structure, or management or business method that is novel to the firm or user and which results, throughout its life cycle, in a reduction of environmental risk, pollution and the negative impacts of resources use (including energy use) compared to relevant alternatives».

2.2.2 Determinant for eco-innovation

Determinants of innovation in general and eco-innovation in particular are usually divided in the literature in two distinct components: the supply side and demand side drivers. In case of the supply side, the crucial importance of innovation for businesses is supposed to push mangers to seize the opportunity to develop new technologies, and this is known as the `technology push'. On the other hand, the demand for new products will force the businesses to adapt themselves and innovate, this is known as the `demand pull'. Likewise, the supply push and the demand pull are considered by the evolutionary theory of innovation as the main drivers for innovation (Nelson and Winter, 1977; Pavitt, 1984), as pointed out by Triebswetter & Wackerbauer (2008):

«Already Schumpeter (1942) further differentiates the innovation process according to market power. He assumes a positive relationship between market power and innovation, suggesting that large firms are more innovative than small ones. According to Schumpeter, monopolists are more innovative because they enjoy superior access to capital, have better possibilities to pool risks and can exploit economies of scale in maintaining costly R&D structures.»

Other authors consider `technological opportunities' as a main driver of innovation, meaning that if there is room to develop technologies not yet discovered, businesses will immediately invest in innovation in order to grasp this opportunity (Cohen and Levinthal, 1989) but only under minimum conditions of intellectual protection as patents, privacy rights, etc. Likewise, the first mover advantage, `learning curve effects', and economies of scale (Dosi, 1988) or via regulation by created new demand for instance constitute other important drivers for innovation.

Consequently, ER constitutes a relevant eco-innovation driver, as suggested above; together with the push-pull effects of both market sides' factors that encourage ecoinnovation (Kemp, 1993). Admittedly, «profit-maximising firms will seek ways to reduce their production costs for a given level and quality of output, including environmental aspects.» (Triebswetter & Wackerbauer, 2008)

In fact, according to Türpitz (2004) ER has played a great role in the development of eco-innovation and thusly reducing the environmental externalities. Another research found that for proactive innovative companies, the «anticipation of upcoming legislation is a decisive factor for environmental innovations» (Rehfeld et al., 2004).

Krozer, (2002) argues that «none of the other drivers (e.g. new technology, incentives, information or knowledge transfer) have been found to be as significant as the legislative push for eco-innovations.» Since, ER offers a «clear time lines and certainty of regulation» which is much valued by managers. Clayton et al. (1999) came to the same conclusion about the positive effect of ER on eco-innovation; however they added that it should be adapted to the specific features of each industry. Finally, Ashford (2002) pointed out the critical importance of the design of ER (whether it is market-based or Command & Control) in order to limit the trade-off between environmental protection and competitiveness.

2.3 The Porter hypothesis

According to Lundgren & Marklund (2010), the common argument against strict ER is that companies are obliged to decrease production, or shift capital investment to particular assets that might be less productive. Therefore, both the level and the growth of the productivity might be hindered, and consequently the competitive position of the firm and its revenues. In other terms, the ER is not appreciated by managers since they consider only the considerable incremental costs caused to their business. Nonetheless, Michael Eugene Porter, Harvard Business School Professor, looked critically into these arguments (Porter, 1991) and came to the conclusion that «right kind stringent environmental regulation», such as market based instruments i.e. «pollution taxes, tradable permits, and deposit-refund schemes» (Porter and van der Linde. 1995, p. 111), might on the contrary increase the competitiveness of businesses. This argument is known nowadays as the Porter Hypothesis. This premise is detailed in the article written by Porter with the collaboration of van der Linde (1995). The authors exposed as their main argument the fact that the link between business's competitiveness and ER must not be observed from a static point but rather for a dynamic one. The dynamic understanding of this relationship allows figuring out the positive impact on the performance of business through `over-time adjustments'. To put it differently, firms must adapt themselves in order to comply with the ER by incorporating process and technological innovation that that will enhance business competitiveness. Henceforth, the profit increase may be so important that the costs of compliance induced by the ER are

offset. In view of that, ER has an ultimate positive effect on both the business through enhanced competitiveness and the society with less environmental damages. This situation is commonly called the «win-win» PH or the double dividend, furthermore, this «win-win» situation is seen in the academic literature as the «strong» Porter hypothesis. Likewise, the situation where ER will stimulate only certain kinds of eco-innovations without a direct effect on the competitiveness of the firm is presented as the «weak» Porter Hypothesis (Jaffe and Palmer, 1997). A third version of the PH is the «narrow» one; it stresses the fact that flexible ER is more likely to achieve the expected results than command and control type of environmental policies. (Lanoie, et al., 2011)

2.3.1 The weak Porter hypothesis

The neoliberal economic view is that economic agents (firms, consumers) behave effectively under the rules the free market. Supply and demand will determine the prices on each market which will send a signal to economic agents so that they can take the right decisions. In fact, if the market works perfectly, scare resources available to the company will be allocated optimally (Lanoie & TANGUAY, 1999).

If this is the case then government intervention in economic affairs is to be avoided since the market is efficient. Indeed, government intervention will only be useful for redistributional activities or when markets do not play well their role, in other words, in case of a market failure (Lanoie & TANGUAY, 1999). This is precisely what happens in the case of environmental externalities. In fact, one of the essential features of the well-functioning of the markets is the existence of well-defined property rights (Coase, 1960). Clearly, in case of environmental resources such as air and water where property rights are very difficult to define, the governmental intervention is necessary. Since, air and water belong to no one (and everyone at the same time), the economic agents can use them at a zero cost, while the actual cost for the whole society is far from being null. The polluters are given the wrong incentives and, as they use these resources without paying for their real cost, they intend to overuse them. Therefore, the market mechanisms alone generate too much pollution compared to what is desirable or optimal. Government intervention is legitimate in order to control pollution and reduces it to a level that is tolerable. To do so, the regulator has an array of instruments such as regulation or taxation that can ensure that the polluters receive the right signal and face the true costs of the environmental externalities that they cause (Lanoie & TANGUAY, 1999).

In light of this reasoning, the consideration of the environmental externality and its internalisation is necessarily associated with increased costs for companies that used to pollute without suffering any consequences. The environmental protection is perceived as a trade-off between those who desire stricter environmental standards and those who have to comply with these norms, namely the businesses. The challenge is consequently to balance the desires of society for a cleaner environment and the additional costs imposed on firms.

2.3.2 The strong Porter Hypothesis

Brännlund and Lundgren (2009, p. 9) defined the strong PH as the productivity gains induced by the ER so that the whole costs of attaining it are, at least, compensated by the productivity increases. In this context, it is relevant to point out that Porter (Porter, 1991; Porter and van der Linde, 1995) has the credit of giving an approach that deviates from the dominant design in those days. Porter's argument was that: appropriate government environmental intervention can trigger innovations that can offset the costs of compliance with the regulations. As a result of strict ER, companies will reconsider their production process and will develop new approaches to reduce the pollution while lowering their costs and / or increasing their production. The possibility that regulation encourages innovation imply that firms decisions are not always the optimal choices as there is a high level of information imperfection and a certain inertia while organisational opportunities and technologies are developed continuously. Thus many innovation opportunities are overlooked by firms as their level of awareness is limited. If ER stimulus to eco-innovation is sufficiently important then ER would offer the possibility to improve environmental conditions at zero cost or negative net costs by improving productivity. Consequently, by stimulating innovation, ER may actually make businesses more competitive. As an example, regulations on recycling products could lead to the recovery of valuable materials more easily. Both consumers and producer could then end up winners when disposing of the consumed product. (Lanoie & TANGUAY, 1999)

Undoubtedly, such a view has received close attention from all stakeholders who want stronger environmental policies, such as environmentalists. If ER may be without costs or even with negative costs then regulation is good for both the environment and the businesses.

Porter initially expressed his argument in a one-page article (Porter 1991) and then extensively formulated it in a common article with van der Linde (1995) and later on with Esty (1998). According to Porter (1991) «strict environmental regulations do not inevitably

hinder competitive advantage against foreign rivals (p. 96)». And «... the environment-competitiveness debate has been framed incorrectly (Porter & van der Linde 1995, p. 97)». The authors emphasised the crucial role of innovations as their core argument. Wagner (2004) indicated that: «In reality, one is faced with a dynamic competition process, rather than a framework of static optimization.» Because firms are «... currently in a transitional phase of industrial history where companies are still inexperienced in dealing creatively with environmental issues (Porter & van der Linde 1995, p. 99)», which implies incomplete information and organisational inertia. Wagner (2004) adds: «In such a situation properly designed regulation can have an influence on the direction of innovation in that (Porter & van der Linde 1995, p. 99-100):

- It signals to firms resource inefficiencies and possibilities for technological improvement;

- If focused on information provision, it can increase firms' awareness for improvement potentials;

- It reduces the uncertainty of net paybacks from investments;

- It «... motivates innovation and progress» (Porter & van der Linde 1995, p. 100);

- It provides a `level playing field' and is necessary in situations with incomplete offsets.»

The idea underlying the reasoning of Porter is that pollution is generally associated with resources and raw materials that are not fully utilised or wasted energy.

«Pollution is the emission or discharge of a (harmful) substance or energy form into the environment. Fundamentally, it is a manifestation of economic waste and involves unnecessary, inefficient or incomplete utilization of resources, or resources not used to generate their highest value. In many cases, emissions are a sign of inefficiency and force a firm to perform nonvalue-creating activities ... Innovation offsets will be common because reducing pollution is often coincident with improving the productivity with which resources are used.» (Porter and van der Linde, 1995, p. 98)

Thus there is room for innovation in order to prevent pollution and reduce the waste. Specifically, Porter refers to two broad categories of innovations. Firstly, process improvements when reducing pollution is associated with higher productivity through material savings, reduced energy needs and reduce costs of disposal; a typical example is to find ways to use waste, scrap and residues as new combustion source. Secondly, there are also gains to be made at products level where reducing pollution is accompanied by a design

product of higher quality, safer, cheaper, with more value for the consumer or is less costly to the trash. (Lanoie & TANGUAY, 1999)

The academic research conducted by Sinclair-Desgagné and Gabel (Sinclair-Desgagné 1999; Gabel & Sinclair-Desgagné 2001; 1993) came to a similar conclusion, they considered in fact ER as «... an industrial policy instrument aimed at increasing the competitiveness of firms, the underlying rationale for this statement being that well- designed environmental regulation could force firms to seek innovations that would turn out to be both privately and socially profitable (Sinclair-Desgagné 1999, p. 2)». Moreover they proposed a number of conclusions such as «... [it is] inconsistent, albeit convenient, to assume that markets are flawed but that firms are perfect (Gabel & Sinclair-Desgangé 2001, p. 149)». Another conclusion was that although «standard neoclassical-economics models do not support the systematic presence of low-hanging fruits (Sinclair-Desgagné 1999, p. 3)» the authors indicated that «[I]nnovation itself is not free, and if one prices managerial time and all other in puts correctly at their opportunity costs, it should become clear that putting stronger environmental requirements on polluting firms generally increases their production cost more than their revenue (Sinclair-Desgagné 1999, p. 2)». Ambec and Barla (2006) observed that the management tend to be `present-biased' and may delay investment in costly assets even if they may be productive («low-hanging fruits»):

«Because the cost of innovating is for «now» while the benefit is «later,» a present-biased manager will tend to postpone any investments in innovation. By making those investments more profitable or requiring them, environmental regulations help the manager overcome this self-control problem, which enhances firm profits» (Ambec, et al., 2010).

In addition, according Gabel & Sinclair-Desgangé (2001) «[It] is logically most likely in situations where the firm is far from the efficiency frontier, where the burden of the compliance cost is light, and where the shift to the frontier can be made cheaply» (p. 152). Finally, Xepapadeas & de Zeeuw (1999) concluded that «basic argument nevertheless remains the X-efficiency argument that external shocks caused by stringent environmental regulations may reduce inefficiencies and failure within the firm».

Another way to look at the situation is to suppose that businesses might operate under their potential because of bad management and lack of perfect information. A clear definition of property rights (Coase, 1960) with regulation to limit information asymmetries (Akerlof, 1970), may lead to Porter's the win-win or positive sum game with Pareto

improvement. In practice, however, regulation usually has been associated with decreased competitiveness, deterring innovative activities (Cerin, 2006).

Ambec and Barla (2007) explain, through a game theory application, the spill-over effect of R&D investment that justifies the Porter hypothesis. Consider two firms with the same technology and each with a monopoly on two separate markets. They get a profit of ðp. Each firm must decide whether to invest in research and development (R&D) to achieve a more productive and cleaner technology that allows it to achieve a gross profit of ðV with ðV >ðp. The cost of developing this new technology is I. Consider the extreme case where the spill-over is complete so that a company has a perfect access to results of another firm at no cost. In other words, innovation is a public good. A company can have access to new technology at no cost if its competitor invests in the project. If the two companies perform R & D investment that each should I/2. The game is represented by the following matrix:

Spill-over effect of innovation

Firm 2 No R&D R&D

Firm 1 NoR&D

R&D

ðp, ðp

 

ðv, ðv -I

ðv -I , ðv

ðv -I/2, ðv -I/2

Figure1: Ambec and Barla (2007)

So if ðv-I <ðp but ðv-I/ 2> ðp, then this is exactly the situation of the so-called classic `prisoner's dilemma': the Nash equilibrium is `no firm invests' while if they could cooperate, both would benefit from the jointly developed the new green technology. Environmental regulation as a standard that forces the adoption of new technology could therefore benefit both players. Other environmental regulations a priori costly for the company such that a carbon tax or a system of emission permits would lead to the Nash equilibrium where both firms invest in R&D. They save on the costs of R&D spill-over, the new technology requires an investment of individual I/2. Their final gain is ðv-I/2, greater than the gain before regulatory Nash equilibrium ðp. (Ambec & Barla, 2007)

Schematic representation of the Porter hypothesis

Figure2: Ambec & Barla, (2006)

2.3.3 Critics of the Porter hypothesis

The controversy around Porter's hypothesis has animated several debates among economics academia. The motives are different: Firstly, the questioning of the basic paradigm that the firms maximise their profit under free market condition with no need to any supplementary restraints, otherwise these constraints will rather increase their costs and consequently impact their competitiveness negatively. Secondly, the lack of analytical proof in Porter's work based on case studies of some companies in selected sectors, which does not allow for generalising. «Is it really in all areas that the `profitability green' is possible?» According to Palmer et al. (1995), before concluding that more stringent ER has to be applied, one should first answer the previous question. Thirdly, the governmental intervention in the private sector is subject of a debate among economic researchers in order to identify business opportunities. For Palmer et al. (1995) «if opportunities exist, the state does not have to intervene to encourage companies to identify them, they will do it for themselves given that firms are aware of systematic improvements production process or technology». Many researchers agree that ER may trigger eco-innovations; however this case would be «the exception rather than the rule». Thus, even if businesses may overlook new cleaner and cheaper processes, it is dubious that regulators are better capable to assess the innovative potential than company management.

In the same vein, while defining competitiveness broadly, Jaffe et al. (1995) have identified one hundred studies on the effects of environmental regulations on competitiveness. There is little empirical evidence that supports the hypothesis that the regulation has had an adverse effect on the competitiveness of firms. If the long-term costs of regulations can be high, including high costs on productivity, studies measuring the

effects of regulation on net exports, trade flows and the decisions (re) location of firms have produced estimates that are generally insignificant. The reasons given by economists have little to do with compensating innovations. Except for the most polluting industries, the costs of the environmental regulatory compliance represent a small proportion of total costs. Moreover, firms seem reluctant to (re) locate for reasons of environmental standards. (Lanoie & TANGUAY, 1999)

Similarly, the relationship between ER and competitiveness has been largely debated among academics. Fundamentally, two main visions are opposed concerning this link between competitiveness and ER. On one hand, the traditional school which main concern is the possible negative effect that would have a governmental intervention on productivity and competitiveness of private economic agents (Palmer et al., 1995). On the other hand, the defenders of the `win-win' situation generated by the ER as a stimulus for eco-innovation, leading ultimately to both a decrease in environmental externalities and a boost of business productivity (Porter and van der Linde, 1995). Several empirical analyses have been conducted to show the dissimilarities between the two views. The empirical results concerning the test of PH on the link between ER and competitiveness are quite equivocal. The most influential articles found in the literature would be «Stewart, (1993); Gray and Shadbegian, (1995); Repetto, (1995); Boyd and McClelland, (1999); Wagner, (2004), King and Lennox, (2002); Sharma and Arragon-Correa, (2005)» (Triebswetter & Wackerbauer, 2008). However, a strong empirical support of PH is hardly found (Murty and Kumar, 2001).

Another argument against the PH is brought by Simpson & Bradford III (1996), showing that typically stricter ER leads will not enhanced firms' competitiveness because it governmental intervention will rarely trigger the right eco-innovation. They add: «... it is by no means clear that the benefits will repay the investment in the necessary innovation ... innovation as the mechanism by which stringent environmental regulation is translated into long-run competitive advantage (Simpson & Bradford III 1996, p. 283)». They justify their analysis on the basis of incremental costs, assuming that in order for a firm to improve its competitive position it has to decrease its marginal costs but they found that regulation would rather increase the marginal costs on what they called «direct effect», while the indirect effect would be a decrease in variable costs «and thus marginal costs through innovation». They made the assumption that«...the government's objective is to maximise a domestic firm's profits net of the (presumed) environmental externalities it imposes (Simpson & Bradford III 1996, p. 283)». The authors came to the conclusion that even if «it is possible to develop a model in which effluent taxes in excess of marginal external

damages are optimal (Simpson & Bradford III 1996, p. 284)» it will not be easy to define the right design for ER so that it will trigger eco-innovation, and if so it will be valid only for some specific situations and therefore it may create collateral disadvantages for other industries for instance. Henceforth, «even if tougher environmental regulations did serve to enhance competitive advantage, the same objective might be achieved more effectively by more direct and conventional policies (Simpson & Bradford III 1996, p. 284)», consequently «...tightening regulation to induce advantage may be extremely dubious as practical policy advice (Simpson & Bradford III 1996, p. 284)».

Another major critic addressed to the PH by its opponents is the (implicit) assumption of overlook opportunity to `voluntarily' enhance their competitiveness through environmental innovation. The metaphor used is that there is no «10-Dollar bill on the ground because if it was there, somebody else would have picked it up already» (Wagner, 2004). The other questionable assumption is the one arguing that the governmental regulator is more able to define the most effective ER in order to encourage eco-innovation without negative impact on firms' competitiveness. In the same context, other economists challenged the PH by the assumption of profit maximisation and the other metaphor of the "low hanging fruit", arguing that if it was any opportunity for firms to increase their profit there is no need for regulation since the economic agents are rational (Wagner, 2004).

According to Palmer & al. (1995), even if RE may eventually increase the competitiveness of businesses through eco-innovations «these cases would be the exception rather than the rule». They argue that the return of R&D investment is hardly determined «ex-ante»; «it may be that, by chance, a company is equipped with technology that ex post turned out to be profitable». They added that Porter and van der Linde procedure of listing some "success stories" is far from proving the presence of a «systematic link between ER positive and profitability». In this context, Palmer & al. (1995) concluded that «one could equally find cases where firms have seen their costs and increase their profits shrink». (Ambec & Barla, 2006)

2.4 Conclusion

To close this section, a brief recall of different points exposed seems relevant. In fact the first subsection made the difference between product eco-innovation and process ecoinnovation with a clear definition of both of them. Secondly, the different drivers of ecoinnovation were detailed including the so-called push/pull effect of the both sides of the market for environmental innovation. Finally, the part concerning the PH touched to its the

different configuration, namely the weak PH with a clear impact of environmental regulation on eco-innovation (which is somehow a must happen effect since one would certainly expect firms to adapt if they have to comply with compulsory standards), the narrow PH with a distinction of the effects on innovation depending on the design of the environmental regulation, and finally the strong PH, subject of the current thesis, where no robust conclusions could be drawn since the results were varying so much from one study to another. This may also be due to the difficulty to measure empirically the strictness of the regulation and compare the gains with the compliance costs to check the total or partial offset. At last, one of the major critics to the PH remains the fact that the initial hypothesis relies on case studies rather than empirical evidence which does not allow generalising.

3 Hypotheses of the theoretical model

3.1 Better access to markets

Improving environmental performance may facilitate access to certain markets. In general, reducing pollution and other environmental impacts can revive the image or the overall business prestige, thereby increasing customer loyalty and supporting sales. In particular, if one wants to evaluate the potential to reach more customers of green companies , it is useful to scrutinise the policies of public and private organisations that are focusing more on the environmental performance (or performance in terms of sustainable development) as a purchasing criterion when selecting suppliers of goods and services (demand pull). This phenomenon is also known as `buy green'. Many companies now take into account in their purchasing decisions, considerations related to social responsibility. Indeed, according to an OECD survey, involving over 4000 facilities in seven different countries, 43% of these latter evaluate the environmental performance of their suppliers (Lanoie, et al., 2007).

The magnitude of the green public procurement is difficult to assess, but it is clear that this phenomenon does exist. Also, in May 2001, the Environment Ministers of the OECD countries have adopted an Environmental Strategy for the first decade of the 21st century that contains a recommendation to «improve the environmental performance of procurement practices public.» It seems that by improving their environmental performance, some companies have actually an easier access to certain markets. At this stage, given that green procurement seems more present in the public sector, the companies that are most the likely to benefit from it are those who sell to the public organisations (construction, energy, transportation equipment, medical products and office equipment). Taking into account this theoretical background, one can formulate the following hypothesis:

H1: Firms investing in eco-innovation have a better access to certain green markets compared to their conventional competitors.

3.2 Product differentiation

When companies decide to stand out by creating products and services more environmentally friendly, they can hope that, in the future, it will allow them to exploit lucrative niches within their industry and therefore benefit from increased revenues and they can pass on the extra cost incurred to customers willing to pay products or services more environmentally friendly. Thus, Sinclair-Desgagné (2004, p. 6) writes that «many companies

(like McDonald's, Exxon, etc...) learned the hard way that consumer loyalty to their products depends largely on the perception that they are environmentally benign.» It is clear that consumer behaviour can have a significant impact on sales. It appears that the differentiation strategy is more likely to be effective if: 1) information about the environmental attributes of the product is credible (e.g. eco-label), 2) consumers are willing to pay and 3) innovation is protected from imitation by competitors. Various examples suggest that a wide range of businesses can actually improve their environmental performance and achieve higher incomes by using this strategy. Even companies that produce goods rather homogeneous and usually difficult to differentiate, such as agricultural products and energy, can also achieve similar results (Lanoie, et al., 2007).Therefore, and after examining this condition the following hypothesis may be stipulated:

H2: Eco-innovative firms have a higher return on sales since they are able to differentiate themselves than other firms.

3.3 Technological rent

Resolution of environmental problems has become an important business opportunity for companies specialising in this field. This is often referred to as the `environmental industry'. The important aspect here is to identify the situations where a company which wants to improve its environmental performance has optimised its manufacturing or waste management through the development of technologies for pollution control. This may lead to the development of technologies that may eventually be sold to other firms. Companies adopting such a strategy may also receive a benefit from being the first player («first-mover advantage») and lobby governments in favour of tighter regulation according to their higher and thus export their eventual competitive disadvantage.

Since it is difficult to find examples of companies that have benefited from technological opportunities as derivative trading, one would assume that «the market of technology for pollution control» as a way to turn an environmental problem in increasing revenue is not a widespread phenomenon (Lanoie, et al., 2007). The only example would be the case of companies which should already have research facilities, and many resources, and eventually sell to other businesses the technology of pollution control that they have developed for their own needs. In light of these findings, the next hypothesis can be formulated as follow:

H3: Firms that invest in eco-innovation increase their return on sales by selling their technologies to other firms.

3.4 Cost of materials and energy

Porter suggested that pollution is generally associated with the waste of resources not fully utilised, or loss of energy (Porter 1991 and Porter and van der Linde, 1995). He concludes that environmental policies both more stringent and more flexible (e.g. taxes and tradable permits) would benefit the economy, in a way that they stimulate innovations which will in turn offset the costs of compliance with these policies. Similarly, Katz (2003) shows, from a sample of 33 LEED (Leadership in Energy and Environmental Design) certified green buildings that the financial benefits of green design reaches more than 10 times the additional cost of environmentally friendly building. In fact, the range of opportunities to reduce both pollution and energy costs of equipment and services appear to be quite large. Over the past eight years, Lanoie has collected more than 50 examples of firms that have succeeded in reducing pollution as well as the costs of resources, energy and services. Such opportunities are more likely to stand for companies whose production methods are flexible and with effective means of communication in order to facilitate the transmission of new ideas to decision makers. Furthermore, the likelihood of success is greater for industries subject to fierce competition, hence the cost reduction is more important in sectors where there are market based environmental policies (for example, pollution taxes or tradable permits) to trigger eco-innovation (Lanoie, et al., 2007). Subsequently, the next model hypothesis is formulated this way:

H4: Eco-innovative firms increase their profit compared to their non-innovative competitors by producing via more efficient processes.

3.5 Cost of capital

According to Lanoie, & al. (2007) the capital lies at the heart of any business. The funds needed to finance a new firm, its growth or simply the continuation of its activities does not get easily and can be costly. A company that maintains a positive environmental image may see its task simplified in three distinct ways: access to green funds, the loan facility from banks and improved performance in stock markets. Firstly, some researchers in finance believe that the growing number of green (or ethical) mutual funds had the effect of increasing the total funds available to businesses that meet certain environmental criteria. In particular, investments in U.S. funds subject to control socially rose by 258% between 1995 and 2005. This exceeds the growth rate of other funds administered by professionals. In France, the increase recorded was 92% between 2002 and 2006. Canada has also increased sharply, investments from 65.5 to 500 billion dollars between 2004 and 2006. In 2005, about

10 dollars administered by professionals in the U.S., nearly $ 1 (or 9.4%) was invested in a socially responsible fund. This percentage was between 10 and 15% in Europe. In short, environmentally friendly companies have access to a growing source of capital which reduces their cost of capital compared to other similar firms. Secondly, companies that improve their environmental performance can more easily get financed from banks. Given that most of the major banks have now teams of experts in assessing the environmental performance of potential borrowers and especially the potential magnitude of responsibilities associated with contaminated resources. In addition, some 40 international banks have adopted the "Equator Principles" in order to ensure that the projects they fund are held in respect of the environment, and 17 demonstrate appropriate practices of environmental management. Thirdly, the shareholders in general may be influenced by information related to the environmental performance of companies and their reactions can be felt on the stock market. These movements can, in turn, affect the cost of capital. Many empirical studies have attempted to identify the stock market reaction to news about environmental performance. The literature brings out three dominant approaches: a) portfolio analysis, b) the event studies and c) the long-term studies using the regression analysis. The vast majority of these studies indicate that better environmental performance is associated with better stock market performance (at least, it is not worse). Rising stock prices relative to the rest of the market may in turn reduce the cost of capital. Companies listed on the Stock Exchange are more likely to benefit from lower capital cost as a result of improved environmental performance. In short, the following hypothesis will be examined

H5: By having access to cheaper capital, green innovative firms increase their return on sale compared to other firms, ceteris paribus.

3.6 Cost of labour

To be fully effective, a company must have a clear vision and well-defined standards with ambitious goals. It would be difficult for any firm to continue to operate if employees perceive that its products, processes and objectives are harmful to mankind.

All point to conclusion that a better environmental performance can reduce labour costs through lower sickness, absenteeism, staff turnover, recruitment costs and improved productivity. Some analysts, like Lankoski (2006), have used this argument in favour of reducing labour costs. However, even if the argument is rather convincing, there is no direct empirical evidence of this effect. To establish empirical evidence of cost reductions related to a lesser degree of pollution, the dataset should reflect the measurements of the costs of

labour, for example the rate of turnover and absenteeism, and data on environmental performance. Intuitively, the type of companies that could potentially cut labour costs by improving their environmental performance would be: 1) those whose emissions may affect the health of their workers, 2) those that seek to attract qualified workers, including scientists, engineers, MBA and 3) those established in regions where sensitivity to environmental concerns is more pronounced (Lanoie, et al., 2007). The last hypothesis of the subsequent econometric model will be as follows:

H6: The eco-innovative firms will increase their return on sales by both reducing their labour costs and increasing their productivity as their employees as they are committed, compared to their competitors.

4 Empirical setting

4.1 Data description

The dataset used for the empirical model in the current thesis is the German part of the Community Innovation Survey (CIS), also known as Mannheim Innovation Panel (MIP). MIP is piloted by the Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung) in Mannheim, on behalf of the German Federal Ministry of Education and Research. It consists of a yearly mail survey, including an only response option. Following the first contact by postal mail, if a firms does not answer it receives a reminder by phone after six weeks with a second copy of the questionnaire. After another six weeks, a second reminder follows. The sample is constructed as a panel with lagged variables to allow the construction of dynamic models. Considering the rather strict ER of Germany, the use of German firms' data is ideal to test the PH (Rammer & Rexhauser, 2011).

The data used for the following model was collected in the 2009 MIP survey, particularly because it contains a set of relevant questions on environmental innovations providing key variables for the model. Compared to other CIS, the MIP has additional questions concerning firms' profitability and other market structure information essential to build up a model with enough control variables to avoid omitted variable bias (Rammer & Rexhauser, 2011).

The first wave in 1993 was only designed for the manufacturing, mining, energy, water and construction sectors followed by another wave in 1995 that included the service sector and more recently retail, wholesale, telecommunication as well as consultancy firms. It is drawn from the Creditreform database (a German credit-rating agency with the largest data base on German firms) according to the following stratifying variables: firm size, region, and industry. Every year the same set of firms are asked to participate in the survey and to complete the questionnaire sent to them via mail. The sample is updated every two years to account for exiting firms, newly founded firms and firms that developed to satisfy the selection criteria of the sample. Additionally a non-response analysis is performed via phone to check and correct for non- response bias. The participation in the survey is voluntary and the average response rate is about 25% (Vuong, 2011). According to Rammer & Rexhauser (2011) «The survey adheres to the Oslo Manual which provides guidelines for the definition, the classification and measurement of innovation. The gross sample of the 2009 wave consists of 29,807 enterprises. The sample is stratified by sector (56 sectors), size class (8 classes according to the number of employees) and region (West Germany and East

Germany). The target population are enterprises with 5 or more employees from most economic sectors excluding farming and forestry, hotels and restaurants, public administration, health, education, and personal and cultural services with German headquarters.»

In the 2009 wave the total number of companies that replied with usable information was 7,657, equivalent of 26 % response rate which just above the mean of similar for voluntary mail surveys of this scale in Germany (Grimpe and Kaiser, 2010), especially because the questionnaire is considered as relative long. The final sample is fairly representative of the gross one in terms of sectoral composition and firms' size distribution of the whole German companies' population. Rammer & Rexhauser (2011) provide more inside information on the process of data collection and, eventually, how they controlled to limit the «selection bias between responding and non-responding firms in terms of their innovation status». To do so, they conducted another non-response survey «surveying 4,829 enterprises by telephone. This survey revealed a higher share of innovating firms among the non- responding firms (63.1 %) compared to the net sample of responding firms (54.3 %).» The sample size of the current model is 3,809 observations.

The main dissimilarity with several other CIS panel data sets is the pattern of individual response. In fact, according to Peters (2008) MIP «is not a typical unbalanced panel for which information on individuals is available for a certain time period without gaps. Instead, one observes a lot of firms which, for example, respond in a certain year but then refuse to participate for one or more years, only to join in the survey again at a later date. This means that the time span for firms under observation is marked with gaps.» He further explains this phenomenon by the possible problem due to link between firm closures and firms' innovation behaviour that could induce a selection bias (Peters, 2008).

A last noteworthy drawback of the MIP is that the eco-innovation data is collected each odd year and not every year.

4.2 Variable definitions

In order to measure profitability variable for the model, the proxy chosen is the 2008 pre-tax returns on sales. The data was collected from firms with seven ordered categories with determined thresholds.

The definition of the dependent variable is inspired from Cearnitzki & Kraft (2008): The starting point will be from the well-known profit equation:

Profit = Sales-Labour cost-Capital cost-Material cost ... (1)

Next step is to divide the two sides of the equation by sales in order to get the profit margin:

fit _ Sales--Labou r c ost--Capital c ost--M aterial c

... (2)

 
 

If one considers the unit Marginal Cost (MC) is equal to the Average Cost (AC) in the long run then the equation (2) may be written as follow:

... (3)

p and q being respectively the price and the quantity of output.

According to the authors the methodology followed is the price cost-margin, they add «the capital costs have been subtracted and need not to be taken into account by capital divided by sales as an explanatory variable in the empirical model» (Cearnitzki & Kraft 2008).

To explain return on sales they propose concentration in the industry and market share arguing that one would expect a greater return on sales in market with high concentration since firms can price at high levels. Moreover they expect firms with high market shares to be more efficient and thus earn higher return on sales. This methodology returns to what was treated previously in the theoretical part concerning the effect of ecoinnovation on competitiveness. Therefore, Environmental Innovation (EI) will be considered as the main explanatory variable and the model will test whether it has a positive or negative impact on return on sales as an index of competitiveness.

To do so, the definition of the explanatory variable EI will follow the same methodology as the one used by Rammer & Rexhauser (2011), where the authors defined EI as «product, process, marketing or organizational innovations that lead to a significant reduction of environmental burdens.» Rammer & Rexhauser did not distinguish between the ecoinnovations which aim explicitly to diminish the environmental externalities and the ones that are rather «a by-product of innovations». The definition includes the environmental benefits at both the firm and consumer level. Also there is no distinction between the new technologies developed by the firm that are absolutely novel for the market as whole or only the new use of existing technology by the firm. They argue that «the rationale behind this view of innovation is that firms can hardly distinguish whether a new used abatement technology is novel to the whole market or only novel to the firm.»

The MIP differentiates between 12 distinct environmental innovations whereas the harmonised CIS survey contains only nine dimensions. Rammer & Rexhauser (2011) determine which dimensions are processes innovations and which ones are products innovations.

Dimensions of Environmental Innovation Distinguished in MIP 2009

DIMENSION OF ENVIRONMENTAL
BENEFITS

SHARE IN
SAMPLE

TYPE OF ENVIRONMENTAL
INNOVATION

EFFICIENCY
IMPROVING

EXTERNALITY REDUCING

PROCESS INNOVATION

Reduced material use per unit of output

35.12 %

X

 

Reduced energy use per unit of output

40.82 %

X

 

Reduced CO2 emissions

32.16 %

-

X

Reduced other air emissions

22.86 %

-

X

Reduced water pollution

22.13 %

-

X

Reduced soil pollution

14.36 %

-

X

Reduced noise burden

23.22 %

-

X

Replaced materials with less hazardous substitutes

22.90 %

-

X

Improved recycling of materials, water, waste

35.44 %

-

X

PRODUCT INNOVATION

Reduced energy use for the customer

35.21 %

X

 

Reduced air, water, soil, noise pollution

27.64 %

-

X

Improved recycling of product after use

23.59 %

-

X

Table1: (Rammer & Rexhauser, 2011)

The main independent variable EI is used according to the definition of Rammer & Rexhauser (2011); They authors explain in their article that the data was collected according to the rating of asked companies on a four grade scale from no environmental benefit to high environmental benefit. Also, they pointed out the relevance of the variable measuring for the «expected impact of energy saving product innovation on profitability». They added «Although external to the firm, energy efficiency of products could be rewarded by the market since it directly reduces user costs and therefore could lead to higher profitability.» For this purpose a dummy variable is created the following table will further explain the functioning mechanism of certain relevant variables for the model. The same logic is followed to measure for environmental innovations introduced during the past year. In order to inspect he hypotheses of the model the authors created a dummy variable for any type of environmental innovations which takes the value 1 if a firm introduced either resource efficiency or externality reducing innovations. Additional control variables are introduced for sector specific unobserved cross-sectional differences by including 21 two-digit sectoral

dummies (Rammer & Rexhauser, 2011). Finally, according to Czarnitzki and Licht (2006) an East Germany dummy should be is included since «this part of the country is characterised by specific economic and institutional structures resulting from the transformation process, including a high level public support».

Variables definition

INDEPENDENT
VARIABLE

DISCRIPTION

Ost

Firms from the `new' German Länder (former East Germany), (0=Western Germany, 1=Eastern Germany).

Iages

Development of innovation expenditure in the current year 1=increase, 2=steady, 3=decrease, 4=not yet known, 5=not possible to say

Qual

Quality improvement by process innovations: yes=1/no=0

Wett5

Products of competitors can easily be substituted by products of the firm

Rek

Average costs reduced thanks to process innovations; 0=no, 1=yes

Ziel9

To reduce materials and energy consumption: 0=no importance, 1=little to 3=great importance

Ziel4

To gain access to new markets: 0=no importance, 1=little to 3=great importance

Mneu

Proportion of total turnover from new or clearly improved products

Iapgtz

Expenditure on product and process design as well as other preproduction costs linked to innovation projects: 0=no, 1=yes

Table2: Adapted from The Mannheim Innovation Panel: Manufacturing and Mining & Services (2008)

5 Empirical estimation

5.1 Estimation model

Return on sales is collected in MIP survey as scale from 0 to 8 with known cut off points. Ordered Probit Model is the most suited for this kind of dependant variables. According to Greene (2009), the general model would be as follows:

The dependent variable in Ordered Probit Model is observed this way:

Y=1 if Y*?å1

Y=2 if å1<Y*?å2

Y=3 if å2<Y*?å3

...

Y=7 if å6<Y*

In this case Y represents return on sales (Umren) and the cut off points would be:

0 = 1, 0% to < 2% = 2, 2% to < 4% = 3, 4% to < 7% = 4, 7% to < 10% = 5, 10% to < 15% = 6, 15% and more = 7, estimation not possible = 8

Y=1 if Y*=0%

Y=2 if 0%<Y*=2%

Y=3 if 2%<Y*=4%

Y=4 if 4%<Y*=7%

Y=5 if 7%<Y*=10%

Y=6 if 10%<Y*=15%

Y=7 if 15 %< Y*

The six independent variables corresponding to each hypothesis are:

The control variables with a relevant theoretical impact on return on sales are:

Three different models, M, M1 and M2, will be tested. M representing the baseline without distinction between eco-innovative firms and non-innovative firms. M1 being the model for eco-innovative firms and M3 for the non-innovative firms in order to answer the central problematic of the thesis.

5.2 Empirical results

Probit Estimation

Independent variables

Model M

Model M1

Model M2

Environmental Innovation

0.0822593**
(0.0403479)

 
 

Market share

0.0775999***

0.0862508**

0.0743373**

 

(0.022197)

(0.029501)

(0.0349319)

Product differentiation

0.0098879

0.0501308

-0.0946248

 

(0.0507557)

(0.0605704)

(0.0958762)

Patent stock

-0.0457845

-0.0516562

-0.0376007

 

(0.0494725)

(0.061838)

(0.0841409)

Martials and energy

-0.0692138**

-.0523971*

-0.1110295

efficiency

(0.0236537)

(.0284859)

(0.0447996)

Cost of capital

-0.0735411**

-0.0505324*

-0.2062648 ***

 

(0.0255448)

(0.0280471)

(0.0620886)

Labour productivity

0.8199367***

0.9515969***

.7446644***

 

(0.0427542)

(0.0678447)

(0.0558337)

Observations

3500

1966

1534

Likelihood Ratio

646.98***

348.64***

338.73***

Pseudo R2

0.480

0.0463

0.0572

Table3: Author's own calculation.

5.3 Model discussion

The empirical estimation provides a useful analytical tool to judge the validity or not of the initial hypotheses postulated in the introduction of the current thesis concerning the impact on eco-innovation on firms' competitiveness with an insight of the key differences between eco-innovative firms and non-innovative firms. The baseline model shows that

environmental innovation does have a significant positive effect on return on sales which confirms the strong porter hypothesis.

The models M1 and M2 give more visibility of the key differences between innovative and non-innovative firms in case of green innovation, providing the reader with additional information concerning with aspect of the eco-innovation does really explain a higher return on sales for eco-innovative firms.

In fact, the higher return on sales of eco-innovative firms compared to non-innovative firms is statistically explained by a greater coefficient for market share, and labour productivity which confirms the two hypotheses stipulated previously and lower additional cost (negative impact on return on sales) in case of cost of capital and materiel and energy efficiency (Porter justified it by that fact that the impact is actually dynamic rather than static).

The coefficients of product differentiation, even if they are not significant, they follow the same logic below with a positive effect for eco-innovative firms and a negative one for other firms.

And lastly, the coefficient of patent stock has led to the opposite conclusion but it is not statistically significant.

To put it differently, from the six initial hypotheses only two were rejected and four confirmed. One may conclude that such results support, even if only partly, the strong Porter hypothesis.

6 Conclusion

As a conclusion for the current Master thesis, it seems relevant to recall briefly its content and the central problematic and the main hypothesis tested:

Firstly, the section 2 allowed framing the subject of the thesis by clearly defining eco-innovation, its determinants and its impact on competitiveness through a relatively extensive literature review of the major empirical works done in the field of the three versions of the Porter hypothesis, namely the weak, the narrow and the strong one.

The conclusions drawn were not as precise as one would expect, due primarily to technical limits such as measuring the stringency of environmental regulation or the specificities of each economic context whether sectoral, national or global.

Secondly, the hypotheses of the thesis were stipulated from purely theoretical background and articulated in way that they could be tested empirically. In this context, here is a reminder of the principal problematic of the thesis:

Does eco-innovation impact positively the firms' competitiveness?

More specifically, the model tested whether environmental innovation (including process and product eco-innovation) has a positive impact on return on sales as an index for competitiveness. The main hypothesis was accepted with a significant positive coefficient in the first Ordered Probit Model estimated.

The model was constructed on the basis of an wide theoretical literature review which provided the essential assumption to define the relevant independent variables, namely environmental innovation, market share, product differentiation, patent stock, materials and energy efficiency, capital intensity and labour productivity. Additional relevant control variables were introduced to limit the omitted variable bias.

Among the six sub-hypotheses four of them were accepted and only the two remaining rejected, mainly because the coefficients were not statistically significantly different from zero which mean that the two models were not statistically significantly different from each other.

Thus, one can finally conclude that the strong Porter hypothesis was only partly confirmed and equally rejected, in respect of theoretical hypotheses of the current study.

Perfectly aware of the limits of the present analysis, the author justifies the formal errors by the limited time-frame and analytical resources. Nevertheless, the originality of the

present paper resides in the fact that besides testing the strong Porter hypothesis on verifying for the positive impact of eco-innovation on firms' competitiveness, the analysis goes beyond by searching for the key factors that differentiate the competitive position of ecoinnovative firms compared to their non-innovative competitors. The preliminary results pending further investigation confirmed three key factors that allows eco-innovative firms to outperform their competitors, ceteris paribus, namely: access to green market such as green public procurement, materials and energy efficiency (Porter's main argument) and access to border sources of capital at a lower cost either because stockholders valuate environmental implication of the firms or by responding to the criteria of green mutual funds.

The author wants to encourage further research in this sense; another way of approaching the subject is by using dynamic panel data since Porter claims that the positive effect of environmental regulation on firms' competitiveness cannot be detected in a static point of view. Furthermore, including more hypotheses and additional dependent variables may increase the explanatory power of the model in order to remedy to the problem of the weak pseudo R2.

Finally, I want to achieve this thesis with the golden words of the management Guru Peter Drucker who once said: «There are only two important functions in business: marketing and innovation; everything else is cost.» (Drucker, 1985) To show that the key of the success for every business is to innovation according to its costumers' needs, and what the coming generations most certainly need is a safe and sound environment to prosper.

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ANNEX

ANNEX I

ANNEX II

Model estimation (M)

Model estimation (M1)

 
 
 
 
 
 

mneu

21 is

ood = od

d= hood = hood =

43

td

z ziel9

(natur

5052 .2173 .1871 1843 1843

z

nt lpro y coded;

Numbe LR ch Prob Pseud

P>|z|

wtt cs_1

obs

2

5 C

ages
ted

. Int

ugrup qua xd incs

8 0

29

0.003

.28

.1

 

8 06

0.8

0.408

0658

1

 

2 0

-08

0404

1785

.0

 

1 02

-1.8

0066

1022

0

 

4 02

-18

0072

050

.0

 

9 06

140

0.000

162

1

 

5 06

2.1

0.030

184

.2

 

4 02

-55

0.000

110

-.1

 

3 00

21

0.3

724

030

0

 

.05

2.0

0.039

 
 

12

.06

0.3

730

 
 
 

.05

-02

0.826

 
 
 

.17

-08

0.397

 
 
 
 

-0.8

0.415

 
 
 

.15

2.3

0.019

 
 
 

Model estimation (M2)

 
 
 
 
 
 

mneu

21 is

ood = od

d= hood = hood =

55

td

ziel9 (natur

.0389 5348 7407 6755 6755

z

nt lpro y coded;

Numbe LR ch Prob Pseud

P>|z|

wtt s_1

obs

2

5 C

ages
ted

. Int

ugrup qua xd incs

3 03

2.1

0.033

058

.1

 

8 09

-09

0.324

853

0.15

 

7 08

15

-0.4

0.655

051

.1

 

5 04

2.4

013

188

-

 

8 06

-33

0.001

295

-.0

 

4 05

133

0000

323

.8

 

7 11

05

553

555

.2

 

3 03

3.5

000

771

-0

 

2 00

21

10559

0.275

023

.0

 

.06

-0.2

0.826

 
 
 

.09

1.5

0.128

 
 
 

.06

1.9

0.055

 
 
 

.21

1.5

0.121

 
 
 

.22

1.7

0.080

 
 

3

.2

2.3

0.017

 
 

6