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Purpose: The aim of this research paper is to analyze the current written articles on policy frameworks that would drive or fail to drive the environmental innovation. In order to achieve this feat, the paper examines the interconnectedness between innovation and regulatory policies.

Design/Methodology/Approach: This paper will rely on literature review of the published articles from scholarly journals, internet data from trusted organizations, and published books. The literature review reveals the interconnection between environmental innovation and regulatory policies within a well-developed theoretical framework. The developed model takes into consideration the myriad policy fronts, and how they can be challenged to bring in environmental innovation to drive business activities in the wake of global environmental challenges.

Findings: Demand factors, EMS on eco-innovation have had positive impact. In addition, stringency on environmental regulations influences only the highly innovative firms and the least innovative firms.

Research Implications/Limitations: This research develops theoretical framework from the past researches in order to manipulate mathematical formulas that lead to discovery of new insights into the relationship between innovation, regulations, and environmental sustainability.

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Practical Implications: The model under discussion opens up opportunity to firms to view eco-innovation and regulations as sustainable business practices.

Originality/Value: No research has addressed the how the level of innovativeness affects response to regulation measures to ensure firms remain eco-innovative.

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The Impact of Policy Instruments in Driving Environmental Innovation

Introduction

The global climatic challenges are posing serious concerns to the corporate world with regard to efficiencies of their product lines and the impact they have on the environment. The products and business processes ought to address the concerns of modern world. As such, most business organizations seek to remain relevant in the wake of the environmental challenges. This calls for the renovations or innovations of products that the market would view as appropriate in cutting down environmental waste. The concept of eco-innovation aims at bringing on board new products that would be friendly to the environment. However, the move towards innovative products would be limited if the policy and regulatory measures are not balanced (Popp, Hafner & Johnstone 2011). This research paper explores the role of demand factors, stringency of environmental regulations, and the level of innovation of the firms in determining the success of eco-innovation.

Literature Review

According to Reid & Miedzinski (2008), eco-innovation should be viewed as a pro-active measure, which includes the legal standards set to meet the norms and requirements of production (p. 2). Kemp (2011) buttresses that “Whether or not an innovation is an eco-innovation depends on whether the innovation on a life cycle basis environmentally harmful than the use of relevant alternatives” (p. 3). All types of eco-innovation should lead to a reduction for energy used in the stages of production, distribution, consumptions, recycling, and disposal only if they cut on resource-intensity. Such can be analyzed using the perspective of whole-life-cycle of given goods and services. The cradle-to-cradle concept of innovative production, all resources used in the creation and distribution of goods and services can be classified as either technical or biological nutrients. Whereas technical nutrients refer to those outputs and inputs that are recyclable and reusable, biological nutrients are nutrients composted and consumed.  

The regulatory environment policy emanated after debates emerged on how to control manufacturing of nano-materials. According to Fairbrother & Fairbrother (2009), “Public pressure in the European Union over the past decade or more has resulted in a more precautionary stance” (p. 1329). Products that use nano-materials are in the market, and the innovation already show benefits to the environment. This having been justified, the policy front ought to be taken a little higher as the public is aware that more precautions should be taken towards the nano-technology. In addition, Parker (2001) opines that it is critical to have a legitimate consideration of threats as an impediment to regulation.

Nonetheless, according to Kneller & Manderson (2012), the regulations “[…] provide generally robust evidence that environmental regulations stimulate environmental R&D, and also encourage industries to adapt their production facilities in order to integrate environmental protection into the production process” (p. 232). Berman & Bui (2001) support this view on environmental policies, and Baumol (2002) on innovations in the free market economy. From the perspective of the United Kingdom available literature discusses the stimulating role of eco-innovation to capturing the social requirements of the society through corporate social responsibility (CSR). Regulations however affect innovativeness of firms depending on the level of innovation (Kesidou & Demirel, 2012).

Methodology

Theoretical structure shaped by the insights from the literature review of various articles and books pinpoint the critical role of a number of factors in improving innovation of business organizations in modern era. In order to test the hypothesis of this research, qualitative data was collected from the Department for Environment Food and Rural Affairs, (DEFRA). The goal of the survey was to collect adequate data on measures to protect the environment across the industrial firms in the UK. The sample size for the research included 7850 business organization in the manufacturing industry out of whom, only 1599 gave their feedback. Only 1566 of the respondents gave credible information on the survey questions for analysis.

Source: Dries, Larosse & Van Humbeeck (2006, p. 259)

Quotes and References for Goals and Factors

Goal: “Recent reports argue that eco-innovation is the key to realizing 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” (Doran & Ryan, 2012, p.421).

Factor 1; the Demand Factor

In the late 1980s, the linear model was the most popular. Nonetheless, it was slowly faulted for its inability to give new approaches and mechanism for every process in the production line (Kline & Rosenburg, 1986). Today the public is well aware of the critical role that business organization should play for sustainable development. Based on F1, the hypothesis to test in this model is whether demand factors; especially for environmentally friendly goods, services, and CSR, would influence the decision of a business organization to venture into eco-innovation technologies.

Factor 2; Environmental Management Systems, (EMS)’s Significance in Organization

Eco-innovation is becoming a reality for many firms mainly that are financially sound for committing the investments (Kemp, 2011, p. 2). This is because the ability of the firms to invest can reduce, recycle, design green products, and prevent pollution; hence encourage eco-innovation (Costantini & Mazzanti, 2012, p. 135). Florida, Atlas & Cline (2001) add that the performance of the firm’s monitoring systems and asset reserves are also vital in eco-innovation. The role of EMS is to play as an oversight mechanism that would improve the environmental markers way above the existing regulatory threshold set by the political regimes in reducing carbon emissions and waste disposal. Successful implementation of EMS policies has a positive impact on eco-innovation (Horbach, 2008 and Wagner, 2007). Therefore, this research model will test whether ability of a firm to implement environmental discourses can encourage eco-innovation.

Factor 3; Regulatory Measure on Environment

According to Kesidou & Demirel (2012) available literature conclude that “regulatory standards (ambient standards, technology-based standards, and performance-based standards) and market-based instruments (Pigouvian tax, subsidies, deposits/refunds systems, and tradable permits) limit pollution activities” (p. 863). However, in today’s corporate environment the attention is shifting towards the stimulation of environmental regulations to encourage eco-innovation (Blind, 2012, p. 393).

This is according to the evidence streaming from the eco-innovation and regulatory measures in developed nations like the UK, the US, Italy, and Denmark. This trend can be explained by the capabilities of innovative and highly innovative firms, who are already setting high regulation standards for themselves, which is beyond government regulations. As such, strict environmental regulations on eco-innovation for the innovative and highly innovative firms will make them respond negatively. This niche is propagated by the need to gain a wider and sustainable market for goods and services (Grubb & Ulph, 2002).

The model adopted in the research paper gives the factors that determine the outcomes of eco-innovation according to analysis of survey of UK industrial firms. The model demonstrates three significant issues: showing the impacts of policy regulation, the demand factors, and the role of EMS and CSR in creating eco-innovation. The second significance of the model is its ability to methodological approach in analyzing data to disseminate how the three factors affect decision-making process from all stakeholders. Finally, the model allows for the monitoring of firms’ heterogeneity in accordance to innovation levels and their effects on eco-innovation for high and low innovative firms.

Factor 4; CSR Policies

CSR has become an important factor in pushing demand for goods and services. Horbach (2008) and Wagner (2007) support through empirical studies that the eco-innovation point to the significant role demand factors in eco-innovation. Business organizations use CSR as an alignment framework towards addressing the societal expectations for running of a legitimate firm (Palazzo & Scherer, 2006; Garriga & Mele, 2004).

Importance of the Model

This model is significant because it gives new insights into the role of firms and regulations in eco-innovation. The study incorporates CSR and the levels on innovativeness of the firms to direct the future research in related topic. The paper remodels other theoretical models, such as the Heckman selection model, and quartile regression model.

Conclusion

First, this study affirms that demand factors affect decisions of business organization to invest in eco-innovation in accordance to the findings of Horbach (2008) and Wagner (2007). In addition, the empirical study demonstrates that demand factors based on CSR and customers’ requirements have no bearing on the height of investment in eco-innovation.

Second, as Georg, Ropke & Jorgensen (1992), Kemp, Olsthoorn, Oosterhuis & Verbruggen (1992), and Winn & Roome (1993) found out, it is significant to have organizational capabilities with similar ideals as the EMS in a bid to develop eco-innovative products. The study goes further to show that other than organizational decision to eco-innovate, allocation of more resources will increase eco-innovation initiatives.

Finally, the study found out that stringency on environmental regulations influence only the highly innovative firms and the least innovative firms. This should inform the next agenda (Boons & Lüdeke-Freund, 2012).

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