The Impact of Environmental Policy Stringency on Industrial R&D Conditional on Pollution Intensity and Relocation Costs

Abstract

Stringent environmental regulations may encourage industrial innovation, as technological advancements lower the cost of pollution abatement (Popp et al. in Handbook of the economics of innovation, vol II. Academic Press, Burlington, pp 873–938, 2010). The pollution-havens hypothesis, on the other hand, indicates that, rather than innovating, dirty industries may relocate to countries with less stringent environmental regulations (Copeland and Taylor in J Econ Lit 42(1):7–71, 2004). Thus, more stringent environmental regulations may increase or decrease innovative activities. This paper examines empirically the impact of environmental regulations on R&D intensities and R&D expenditures in 21 manufacturing industries in 28 OECD countries from 2000 to 2007. I consider pollution intensity and the relative ease of relocation (immobility) as industry characteristics that determine the optimal industry response to increased environmental policy stringency. I find that more pollution intensive industries innovate less as regulatory environments become more restrictive relative to less pollution intensive industries. At the same time, more immobile industries innovate more than more mobile industries as environmental regulations become more stringent, illustrating innovation as an alternative to relocation.