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Doran and Ryan (2011)

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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 …

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.

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  • 1. Winter Research Symposium, Dept of Economics, University College Cork, 2011Justin 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 programmesThis 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 yourenterprise 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 pollutionEnvironmental 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 useNote 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 €5,064Firm Specific Factors Employment 89 246 Irish Owned (1/0) 76 n.a. Capital (€) €3,606 €36,718Performance 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 ErrorRegulation & 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. ?