Regulatory Complexity and Organisational Environmental Innovations

Abstract

Environmental Management Systems (EMS) are organisational environmental innovations with a remarkable potential for environmental sustainability transformations in firms. Research on EMS treats regulatory compliance pressures as key, yet, one-dimensional determinants of EMS adoption and certification. However, insights from the policy-oriented innovation literature reveal that the impact of regulations on innovation is rather complex and highly dependent on the context in which they are applied. This paper delves into the complexity of regulatory pressures, and examines the impact of different dimensions of regulation– ‘direct’ regulatory instruments, ‘market-based’ instruments, and stringency of regulation– on organisational environmental innovations such as EMS. It uses a unique and comprehensive DEFRA dataset on the environmental expenditures of 2,080 firms, and introduces a methodological novelty by treating the EMS adoption and certification as nested decisions modelled by a Bivariate Probit with Sample Selection model. The paper shows that different dimensions of the UK’s regulatory regime affect firms’ EMS related decisions in different and sometimes contradictory ways: (a) ‘direct’ regulations are effective in stimulating the adoption of EMS; (b) 'market-based' instruments fail to facilitate the adoption of EMS; (c) regulatory stringency encourages firms to adopt EMS; and (d) ‘direct’ regulations and regulatory stringency deter EMS certification. These findings highlight the need for a more thorough investigation of the relationship between regulatory pressures and EMS adoption/certification decisions.