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Does Environmental Regulation Stimulate Innovation?
Mark Thomas Smith1 and Jo Crotty2, (1)Birmingham Institute of Art and Design, United Kingdom; (2)Aston University Business School, United Kingdom
Abstract: This paper reports on two strands of research into the UK automotive industry’s response to the EU End Of Life Directive (ELV). The data is drawn from an empirical study of automotive component manufacturers in the UK, and tests several elements of the Porter hypothesis in relation to the ELV Directive including their ‘innovation for compliance’. The main aims of the ELV Directive are to eliminate hazardous materials from the automotive production process, encourage recycling through reduced pressure on landfill, and stimulate innovation for ‘design for disassembly’. The philosophical basis for this product-oriented regulation is underpinned by ecological modernisation; increased economic activity is consonant with the reduction of environmental impacts (eco-efficiency). A central tenet is that environmental regulation can stimulate the innovation and application of ‘clean’ technologies or techniques, including Environmental Management Systems. Ecological modernisation finds expression through the Porter Hypothesis, which asserts that strict environmental regulation can offer business benefits from innovation through improved product design while delivering improved environmental performance. There is limited empirical research to date that has tested this hypothesis. The results of this study offer limited support for the contention that regulation drives innovation. Firms in this study tended to articulate agreement with this principle. However, this fails to translate into their practices, as few enterprises had introduced ‘greener’ approaches to manufacturing directly as a consequence of environmental regulation. The data revealed that other non-environmental market forces are more powerful motivators for innovation. In concluding the paper also questions the assumption that the objectives of ecological modernization, including product-oriented regulation, address the most critical ecological concerns facing the automotive sector. This regulation effectively diverts innovative capacity into short-term, incremental technological trajectories rather than a more radical, sustainable direction.
 
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