ENVIRONMENTAL-REGULATION AND INNOVATION - A PANEL-DATA STUDY

In a 1991 essay in Scientific American, Michael Porter suggested that environmental regulation may have a positive effect on the performance of domestic firms relative to their foreign competitors by stimulatin g domestic innovation. We examine the stylized facts regarding environ mental expenditures and innovation in a panel of manufacturing industr ies. We iind thar lagged environmental compliance expenditures have a significant positive effect on R&D expenditures when we control for un observed industry-specific effects. We find little evidence, however, that industries' inventive output (as measured by successful patent ap plications) is related to compliance costs.