3 | Competitiveness Effects of Environmental Regulation and the Role of Non-Regulatory
3.6 Conclusion
The difficulty of measuring and comparing regulatory characteristics and so-cial capabilities make the quantitative analysis of the interplay between en-vironmental regulation and competitiveness a challenging endeavor. A fur-ther complication arises from dynamic changes in the direction of regulatory impacts on innovation activities that can be theoretically modeled within the framework of endogenous growth. Using survey data from two different sources, we have been able to assess the direct influences of regulatory char-acteristics and non-regulatory framework conditions on the competitiveness effects of environmental regulation over different time horizons.
The competitiveness effect of regulatory openness is found to be signifi-cantly positive independently of the concerned time horizon. Consistent with the Porter Hypothesis, we also find that regulatory pressure enhances the effect on competitiveness in the long-term, independently of the respective income level of the country. Based on endogenous growth theory, our results can be explained by a long-term upshift of the Schumpeter relation as consequence of environmental regulatory pressure.
Given that our sample comprises OECD and non-OECD countries with very different technological and institutional framework conditions, the dy-namic patterns of regulatory impacts on competitiveness are quite robust.
However, when differenciating between higher and lower income economies we still detect some important differences. The impacts on competitiveness are similar with respect to regulatory stringency, but differ with respect to the timing of the beneficial effect of regulatory openness. To what extent social capabilities condition the available options for regulatory design needs to be further analyzed.
Interestingly, we found no significant direct influence of innovation capa-bility on the competitiveness effect of environmental regulation. In higher in-come countries there is however a significant influence of innovation capability when interacting with regulatory pressure. The effects of regulatory pressure are amplified in both directions, resulting not only in a more positive long-term impact, but also in a more negative short-term effect of environmental regula-tion. While the former effect may be related to the exploitation of lead market potentials, the latter may hint at crowding-out of more efficient innovations.
Such an effect may also explain the negative short-term influence of quality infrastructure in higher income countries.
In lower income countries, quality infrastructure improvements affect the impact of environmental regulation on competitiveness similar to an increase in regulatory pressure, pointing to its potential substitutive role for incentiviz-ing innovation. The success of environmental technologies depends not only on regulatory demand or consumer preferences, but on the existence of so-cial capabilities that enable the measurement, the credible signaling, and the effective monitoring of environmental quality. In competitive markets, a well-functioning environmental quality infrastructure is therfore required to direct technological change towards eco-innovation. Instead of strengthening envi-ronmental regulation, which may be difficult for political economy reasons, investments in quality infrastructure may push environmental performance.
More effort has to go into the empirical assessment of the impact of environ-mental quality institutions, particularly with regard to their potential for the integration of economic growth and sustainability.
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