Innovation-Oriented Environmental Regulations: Direct versus Indirect Regulations; an Empirical Analysis of Small and Medium-Sized Enterprises in Chile

Abstract

It is often suggested that innovation is one of the most desirable environmental policy aims, in that it promises to solve the conflict between environmental regulation and economic growth. Contrary to what is frequently advocated—that in order to foster innovation through regulation, most of the attention should be put on the regulation-setting process, I argue that a cooperative stance in the implementation of regulations also has a crucial impact, especially in small and medium-sized enterprises (SMEs). This argument is assessed looking at innovation effects that both direct regulations (command-and-control) and indirect regulations (negotiated voluntary agreements, called cleaner production agreements) have in this sector. A face-to-face survey questionnaire, with a non-probabilistic matching sampling strategy, was conducted in 322 firms representing four industrial sectors in Chile. The propensity-scores analysis demonstrates that SMEs involved in voluntary agreements innovate significantly more, as expressed through environmental management systems and techniques. In terms of technological innovations, voluntary agreements promoted incremental (rather than radical) multimedia innovations. Nevertheless, they had a significant effect on triggering at least one radical process change in the SMEs engaged in the programme. I conclude by emphasising that a cooperative style in the design and implementation of regulations has a key role to play in environmental capacity building in SMEs, and that this approach can create the appropriate conditions for innovation. However, this potential cannot be fully realised if there are not strong market and regulatory stimuli towards the development of more radical environmental innovations.