The purpose of this paper is to analyse the drivers of eco-innovation and to compare the impact of eco-innovation and non-eco-innovation on firm performance. The paper provides insights into the role government regulation can play in directing and stimulating eco-innovation. The findings suggest that regulation and customer perception can explain a firm’s decision to engage in eco-innovation. Eco-innovation is also found to be more important than non-eco-innovation in determining firm performance.

1. Winter Research Symposium, Dept of Economics, University College Cork, 2011
Justin Doran & Geraldine Ryan

2.  Rationale For The Study
 Eco-Innovation
 Data
 Our Model
 Results
 Conclusion

3.  For many firms innovation is the key to survival
(Schumpeter 1934, Baumol 2002).
 As governments around the world strive to tackle carbon
emissions and climate change, and firms struggle to deal with
increasing fuel costs and financial uncertainties more and more
emphasis is been placed on innovation, and in particular eco-
innovation (Ekins, 2010)
 As consumer awareness increases, government regulations
tighten and sustainable development becomes a financially
astute matter, managing eco-innovation is becoming an
increasingly important issue for firms.
 This study examines the economic drivers of eco-innovation in
2,181 Irish firms and asks whether these innovations impact on
firm performance.

4.  Eco-innovation:
 Where firms develop or adapt innovations which
diagnose, monitor, reduce or prevent
environmental problems
(Beise and Rennings 2003; Hemmelskamp 1997)
 May be technical, organisational or marketing
innovations
(Kemp et al. 2004)

5.  Eco-industry Europe
 2008
▪ Turnover of €300 billion
▪ Directly employed approximately 3.4 million people (European Commission
2009).
 Eco-industry Ireland
 9th in 2010 Eco-innovation Scoreboard
 2010
▪ 18,750 employees work in six key sectors expected to increase to 29,000 by
2015
▪ €660 million was directly committed by the Irish Government to sustainable
energy programmes
This industry has the capability to help the world
recover from the current global financial crises But what Drives Eco-Innovation?
.
(see Schweinfurth 2009; Cainelli et al. 2011)

6.  Traditionally many economists and managers thought of
eco-innovation as an additional cost burden for the firm this
is no longer the case (Ambec et al. 2011).
 However, Porter and van der Linde (1995) argue that
investments in eco-innovation can improve a firms’
competitiveness, increase its profits and reduce pollution.
 They argue that environmental innovations may lead to a
‘win-win’ situation with both economic and
environmental benefits.

7.  Data:
 Irish Community Survey 2006-2008 on a target
sample of 4,650
▪ 2,181 responses
 Question:
1. What are the key economic drivers of eco-
innovation in Ireland?
2. How do eco-innovators perform when compared
to non-eco-innovators?

8. Regulation & Perception
Existing Regulation (1/0) 16.87
Expected Regulation (1/0) 12.61
Government Grants (1/0) 5.96
Customer Perceptions (1/0) 16.23
Voluntary Agreements (1/0) 17.88

9. Environmental benefits from the production of goods or services within your
enterprise
Reduced material use per unit of output
Reduced energy use per unit of output
Replaced materials with less polluting or hazardous substitutes
Recycled waste, water, or materials
Reduced soil, water, noise, or air pollution
Reduced air, water, soil or noise pollution
Environmental benefits from the after sales use of a good or service by the end user
Reduced energy use
Reduced CO2 ’footprint’ (total CO2 production) by your enterprise
Improved recycling of product after use
Note 1: Definitions are taken directly from the Irish CIS questionnaire

10. Mean S.D.
Innovation Activity
Innovator (1/0) 58.78 n.a.
Eco-Innovator (1/0) 42.14 n.a.
Knowledge Generation
Intramural R&D (€) €2,054 €10,253
Extramural R&D (€) €460 €5,064
Firm Specific Factors
Employment 89 246
Irish Owned (1/0) 76 n.a.
Capital (€) €3,606 €36,718
Performance Indicator
Turnover per Employee €696,000 €6,309,000

11. IO i   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i
 The starting point for the empirical analysis is an innovation
production function.
IOi   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i (1)
 Where:
 IOi is a binary variable indicating whether firm i engaged in eco-
innovation,
 R&Pji is a series of j variables which indicate whether firm i experienced
regulation or perception factor j,
 KSki is a series of k variables indicating whether firm i engaged in
knowledge sourcing activity k,
 R&Dli are a series of variables indicating the expenditure of firm i on
intramural and extramural R&D
 Xmi are a series of m variables which control for firm specific factors

12. IO i   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i
 Following from eqn (1), eqn (2) assesses the impact of eco-
innovation, compared to non eco-innovation on firm performance.
Pr odi   0  1 Innovatori   2 EcoInnovatori   j Z ji   2i (2)
 Where:
 Prodi indicates firm i’s turnover per employee,
 Innovatori indicates whether the firm has introduced an innovation
(either ecological or non-ecological),
 EcoInnovatori is an interaction term which indicates whether firm i’s
innovation was an eco-innovation,
 Zji is a series of firm specific variables.
 An interaction term is utilised in equation (2) to identify the unique
impact of an eco-innovation on firm performance.

13. IO i   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i
 As we are hypothesising that innovation and eco-innovation are
determined by a range of firm specific factors in equation (1) it is
implausible to assume that in equation (2) these innovations are
exogenously determined.
 Therefore, a two step procedure is adopted where equation (1) is
estimated for eco-innovators and innovations and the predicted values
are obtained and used as instruments in equation (2).
 As noted by Hall et al . “[u]sing these predicted probabilities instead of the
observed indicators is a way to address the issue of potential endogeneity
(and measurement errors in variables) of the knowledge inputs”
(Hall et al., 2009, pg 23).

14. Coefficient Standard Error
Regulation & Perception
Existing Regulation 0.2770*** (0.0450)
Expected Regulation 0.1677*** (0.0650)
Government Grants 0.2441*** (0.0807)
Customer Perceptions 0.4303*** (0.0371)
Voluntary Agreements 0.4772*** (0.0296)
External Knowledge Sources
Forward Linkages -0.0583 (0.0777)
Backward Linkages 0.1943*** (0.0637)
Horizontal Linkages 0.0118 (0.0964)
Public Linkages 0.0122 (0.0793)
Knowledge Generation
Intramural R&D2 0.0248*** (0.0052)
Extramural R&D2 0.0130 (0.0083)

15. Coeff s.e.
Constant 4.9686 (0.2626)
Innovation Activity
Innovation -0.5145** (0.2117)
Eco-Innovation 0.7520*** (0.1615)
Firm Specific Factors
Employment 0.1501*** (0.0278)
Capital 0.0135 (0.0087)

16. IO i   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i
 Using a new dataset collected as part of the
CIS 2006-08 survey we find:
1. Demand-side drivers
2. Supply-side drivers
3. Regulation drivers
play an important role in motivating eco-innovation
in Ireland.

17.  Supply-side
 Internal expenditure on R&D: positive & significant
 Expenditure on external R&D: no impact
▪ The more innovative a firm and the more knowledge it has
accumulated, the higher its capacity to apply these factors to
environmental innovation
(Kesidou and Demirel 2010; Triebswetter et.al. 2008).
 Demand side factors
 Consumer demand: drives eco-innovation

18. IO i   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i
 Regulations
 Exiting and expected regulations
 Government incentives in the form of grants
 Voluntary industrial agreements (largest impact)
impact on the firms’ inclination to engage in eco-innovation.
 Together these findings suggest that
 Firms engage in some, possibly minimum, level of eco-innovation in
response to industry and society pressures and expectations.
 Possibly a causal relationship exists between these variables.
Education
• Increased • Which
regulation • This then prompts
raises leads to greater
. greater
Awareness Demand

19. IO i   0   j R & Pji   k KS ki   l R & Dli   m X mi   1i
 Eco-innovation, unlike innovation, is found to have a
positive and significant impact on firm performance.
 Firms which engage in eco-innovation have higher levels of
turnover per employee than firms which introduce non-
eco-innovations and firms which do not engage in innovation
activity.
 This supports the Porter and van der Linde’s (1995)
hypothesis that innovation, in many cases, offsets the costs
induced by environmental regulations.

20. ?