2 The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? Stefan Ambec*, Mark A. Coheny, Stewart Elgiez, and Paul Lanoie§ Introduction Some twenty years ago, Harvard Business School economist and strategy professor Michael Porter challenged the conventional wisdom about the impact of environmental regulation on business by arguing that well-designed regulation could actually increase competitiveness: “Strict environmental regulations do not inevitably hinder competitive advantage against rivals; indeed, they often enhance it” (Porter 1991, 168). Until that time, the traditional view of environmental regulation, held by virtually all economists, was that requiring firms to reduce an externality like pollution necessarily restricted their options and thus by definition reduced their profits. After all, if profitable opportunities existed to reduce pollution, profit-maximizing firms would already be taking advantage of them. Over the past twenty years, much has been written about what has since become known simply as the Porter Hypothesis. Yet even today, we continue to find conflicting evidence concerning the Porter Hypothesis, alternative theories that might explain the Porter Hypothesis, and oftentimes a misunderstanding of what it does and does not say. This article reviews the key theoretical foundations and empirical evidence to date concern- ing the Porter Hypothesis and identifies research challenges and opportunities concerning the links between environmental regulation, innovation, and competitiveness. Such a careful exam- ination of both the theory and the empirical evidence can yield some useful insights for the *Senior researcher, Toulouse School of Economics (INRA-LERNA), and visiting professor, University of Gothenburg; e-mail:
[email protected]. yProfessor of management and law, Vanderbilt University, and university professor, Resources for the Future; e-mail:
[email protected].