Environmental Regulation, Innovation and Business Performance—An Empirical Study of the Porter Hypothesis Using Japanese Facility-level Data—

Abstract

Drawing upon facility-level data covering all Japanese manufacturing industries, we verify the validity of the “weak”, “narrow” and “strong” versions of the Porter Hypothesis. To the best of our knowledge, among the empirical literature focusing on Japan, this paper is the first study which tests all the variants of the Porter Hypothesis. Our empirical results suggest that: (1) concerning the weak version, stringent environmental regulations significantly spur innovation. (2) Regarding the narrow version, flexible economic instruments (i.e., environmental tax and subsidy) have a positive and significant effect on innovation; meanwhile, rigid technical regulation and environmental performance regulation have no significant effect on innovation. (3) As for the strong version, although stringent environmental regulation indirectly enhances business performance through innovation, the direct effect of stringent environmental regulation on business performance is negative. To summarize, our findings are consistent with the weak version and the narrow version of the Porter Hypothesis. Nevertheless, there is not enough evidence to support the strong version.