Voluntary Regulations and Innovation: The Case ofISO14001

Governments enact environmental regulations to compel firms to internalize pollution externalities. Critics contend that regulations encourage technological lock‐ins and stifle innovation. Challenging this view, the Porter‐Linde hypothesis suggests that appropriately designed regulations can spur innovation because (1) pollution reflects resource waste; (2) regulations focus firms’ attention on waste; and (3) with regulation‐induced focus, firms are incentivized to innovate to reduce waste. This article explores the regulation–innovation linkage in the context of voluntary regulations. The authors focus on ISO 14001, the most widely adopted voluntary environmental program in the world. Examining a panel of 79 countries for the period 1996–2009, they find that country‐level ISO 14001 participation is a significant predictor of a country's environmental patent applications, a standard proxy for innovation activity. The policy implication is that public managers should consider voluntary regulation's second‐order effects on innovation, beyond their first‐order effects on pollution and regulatory compliance.