Corporate Environmental Responses and R&D Productivity

Abstract

Research on the relationship between corporate environmental performance and financial performance has extensively focused on the influences of external stakeholders’ demand on firm environmental strategies while the mechanisms under which different environmental responses impact internal processes received limited attention. The Porter Hypothesis provides some insights into the induced innovation effects of environmental improvement efforts; however, it is not yet clear if firms that do not reduce environmental externalities also experience innovation outcomes. In this research, we examine the relationship between two environmental responses – the abatement and non-abatement approaches – on corporate R&D productivity. We propose that both responses might induce firm innovations as a result of regulatory cost burden and external pressures. We find empirical support for the effects of non-abatement on R&D productivity which suggests that firms who do not improve their environmental performance are forced to innovate on their existing knowledge stock. We find no evidence for the induced innovation effects of pollution abatement and further provide implications for effective environmental policies.