Induced innovation in clean energy technologies from foreign environmental policy stringency?

Abstract

In this paper, we re-conceptualize the meaning of policy-induced innovations in clean technologies by taking a cross-border approach. Previously, empirical research has shown how domestic climate and environmental policies induce firms in the same country to innovate in clean and environmental technologies. This phenomenon has become known as the Porter Hypothesis. However, most research focuses strictly on domestic inducement effects and, if foreign effects are accounted for, they are assumed to be either “knowledge” or “technology” spillovers. We, however, propose that policy spillovers might also induce innovations in other countries. In order to test this hypothesis, we construct a “foreign” environmental policy stringency proxy. This proxy is used as the main explanatory variable, with the outcome variable clean technologies, defined here as all renewable energy technologies as well as electrical energy storage, because these technologies are predominantly defined within the scope of climate and environmental policies as necessary to combat climate change and set forth as paramount to stemming pollutant causing climate change in the United Nations Framework Convention on Climate Change founding documents. Our results show that foreign environmental policy stringency does, indeed, induce clean-technology innovation at home, but this effect varies with different lag structures in our three models.