Profiting from Environmental Economic Regulations: The Mediating Role of Innovation Capabilities

Literature is concerned on whether environmental economic regulations hamper or incentivize firm performance, aside from their objectives of pollutant reductions. This paper adds to the discussion the inclusion of the effects of innovation capabilities on performance when a firm confronts environmental economic regulations, which impose limits to the products, processes or services, which are pollutant intensive. It is proposed here that in the presence of the innovative capabilities, the firm has the capacity to assimilate and respond to the environmental economic regulation, increasing its performance, and thus the notion of regulations boosting firm performance through such innovativeness dimension. On the other hand, in the absence of the innovative capability, the firm does not have the capacity to either assimilate or respond to the environmental economic regulation, being hampered by it, thus the notion of regulations decreasing firm performance. This study uses the Kyoto Protocol Clean Development Mechanism (CDM) projects as the strategic response of firms to changes in regulation, using the UNEP Risoe Centre's CDM projects database. 1,497 CDM projects were analyzed using econometric analysis, finding quantitative support to the effects of innovation capabilities on the performance of firms confronting environmental economic regulations.