Regulation and firm perception, eco‐innovation and firm performance

Purpose Recent reports argue that eco‐innovation is the key to realising growth. The purpose of this paper is to examine the factors which drive eco‐innovation and test if eco‐innovating firms perform better than non‐eco‐innovating firms. The paper provides insights into the role government regulation can play in directing and stimulating eco‐innovation. Design/methodology/approach The approach utilised by this paper is empirical in nature. Using a sample of 2,181 firms, gathered as part of the Irish Community Survey 2006‐2008, the authors estimate a modified innovation production function in order to assess the impact of regulation, consumer expectations and voluntary agreements on the performance of eco‐innovation, subsequently a knowledge augmented production function is estimated to assess the impact of eco‐innovation on firm performance. Findings 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. Research limitations/implications Due to the limited availability of accounting data this paper uses turnover per worker as the measure of firm performance. As a result, it is not possible to assess the impact of eco‐innovation on firm costs. Social implications The finding that regulation drives eco‐innovation, and that there is no trade‐off between eco‐innovation and higher profit margins for innovating firms, suggests that regulators and policy makers can stimulate growth and create a greener society. Originality/value This paper provides an empirical analysis of the Porter and van der Linde's theory of environmental regulation and firm performance using novel real world data from over 2,000 Irish businesses.