According to the Porter hypothesis, strict

environmental regulation Environmental law is a collective term encompassing aspects of the law that provide protection to the environment. A related but distinct set of regulatory regimes, now strongly influenced by environmental Legal doctrine, legal principles, focu ...

s can induce efficiency and encourage innovations that help improve commercial competitiveness. The hypothesis was formulated by the economist

Michael Porter Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School, and he was one of t ...

in an article in 1991. The hypothesis suggests that strict environmental regulation triggers the discovery and introduction of cleaner technologies and environmental improvements, the innovation effect, making production processes and products more efficient. The cost savings that can be achieved are sufficient to overcompensate for both the compliance costs directly attributed to new regulations and the innovation costs. In the

first mover advantage In marketing strategy, first-mover advantage (FMA) is the competitive advantage gained by the initial ("first-moving") significant occupant of a market segment. First-mover advantage enables a company or firm to establish strong brand recognition ...

, a company is able to exploit innovation by

learning curve A learning curve is a graphical representation of the relationship between how Skill, proficient people are at a task and the amount of experience they have. Proficiency (measured on the vertical axis) usually increases with increased experience ...

effects or

patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...

ing and attains a dominating competitive position compared to companies in countries where environmental regulations were enforced much later. The Porter hypothesis has been applied to REACH. In one conclusion, companies that adopt a

cost leadership In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience (learning curv ...

business strategy In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessmen ...

and have a relatively small product portfolio will fare better than companies that compete by

product differentiation In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from com ...

and have a larger number of chemicals that require regulation. Various studies found that stricter environmental regulation stimulates innovation ("weak" version of Porter hypothesis). There is mixed evidence whether stricter regulation enhances business performance ("strong" version). Whether the type of regulation - market-based approaches or requirements and prohibitions - has an impact, is an open question. Economic theory suggests that market based instruments could be more efficient but there is mixed empirical evidence. A study of OECD countries, however, showed no evidence of permanent effects of environmental policy tightening on productivity following the introduction of environmental measures, regardless of the type of regulation.''Do Environmental Policies Matter for Productivity Growth? Insights from New Cross-Country Measures of Environmental Policies'', Silvia Albrizio, Enrico Botta, Tomasz Koźluk, Vera Zipperer. OECD Economics Department Working Papers 1176, OECD Publishing, 2014

.

References

Further reading