Regulation and firm perception, eco-innovation and firm performance

Purpose: Recent reports argue that eco-innovation is the key to realising growth. The purpose of this paper is to examine the factors which drive eco-innovation and test if eco-innovating firms perform better than non-eco-innovating firms. 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. Using a sample of 2,181 firms, gathered as part of the Irish Community Survey 2006-2008, the authors estimate a modified innovation production function in order to assess the impact of regulation, consumer expectations and voluntary agreements on the performance of eco-innovation, subsequently a knowledge augmented production function is estimated 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 eco-innovation and higher profit margins for innovating firms, 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 theory of environmental regulation and firm performance using novel real world data from over 2,000 Irish businesses.