The Impact of Environmental Regulation on Firm and Country Competitiveness: A Meta-Analysis of the Porter Hypothesis

Abstract

Since the early 1990s, the validity of the Porter Hypothesis has been the focus of intense research efforts to establish whether well-designed environmental regulation may enhance – rather than reduce – competitiveness. However, little consensus exists on the extent to which (if at all) environmental regulation might generate profitability enhancing innovation offsets. In response to this lack of clarity in the literature and the pressing public policy implications of the Porter Hypothesis, this paper reports on a meta-analysis of 103 publications which estimate the relationship between environmental regulation and firm or country-level productivity or competitiveness. We find considerable heterogeneity in both the sign and significance level of the over 2,000 estimated “effect sizes” found in these studies. When systematically comparing all studies, we find evidence that a positive effect of environmental regulation on competitiveness is more likely at the state, region or country level, compared to the facility, firm or industry level – although in both cases the most likely scenario is a statistically insignificant effect. These findings are consistent with the strong version of the Porter Hypothesis whereby strict but flexible environmental regulations induce innovation and over time increase country-level competitiveness.

Keywords: Porter Hypothesis, environmental policy, competitiveness, financial performance

JEL Classification: Q52, Q58, H23, L21, F14