Is Porter's Hypothesis Correct - Essay Example

? Porter hypothesis: is it correct? Introduction If we talk about the environmental innovation we can’t but mention that it depends not only on technical and market opportunities but also on the regulation. There is much controversy around the issue if environmental innovations that are determined by regulation are beneficial for the companies. The controversy started when the professor Michael Porter came over with the idea that well-considered environmental regulation can only increase companies’ profit. This idea was stated twenty years ago and appeared to be disproving for all the previous opinions, which came to the same conclusion: environmental regulation are not beneficial for organizations as they have to spend much for innovations that decreases their profit. Hypothesis by Porter disproves such opinion stating that the strict policy stimulates “innovation offset”. If resources are used efficiently, the economy will only benefit. Since the hypothesis was stated there has been much controversy around it, many disproving theories have appeared notwithstanding that some of Porter’s words were simply misunderstood (Ambec et al, 2011). Certainly, such a supposition can’t be considered as correct without case study. The given paper will try to define if the Porter hypothesis is correct by analyzing the corresponding literature. The main questions “Over the past 20 years, much has been written about what has since become known simply as the Porter Hypothesis (PH). Yet even today, we find conflicting evidence and alternative theories that might explain the PH, and oftentimes a misunderstanding of what the PH does and does not say” (Ambec et al, 2011). Actually, for now experts hesitate to answer the question what influence environment innovations have on organizations. The issue remains unclear. It is obvious that environmental innovations are not provided for free and they become a reason for additional expenses that at first sight can’t bring any advantage to firms. At the same time such regulation create good environment for eco-innovators’ activity (Ambec et al, 2011). To prove or disprove Porter’s hypothesis it is necessary to determine if environmental innovation determined by regulation is as successful as innovation determined by new technical and market opportunities. It is not less important to answer the question if regulatory-based environmental innovation is beneficial for organizations and their activity. The Porter hypothesis is correct The review of literature shows that despite numerous hesitations, controversies and disproving opinions “Porter spirit” appeared to be contagious that would never happen it the argument were wrong and useless. According to Alex Krauer, "Financial performance and environmental performance can go hand in hand. Eco-efficiency is the key to sustainability, in both economic and ecological terms. The key to eco-efficiency is innovation and productivity improvement" (cited in Bernauer et al). This argument serves as the proof of Porter hypothesis’ popularity, moreover many developed countries try to bring this idea to life. Such approach was given a definition of a “win-win” opportunity, when both the wolves have eaten much and the sheep have not been touched. Porter states: “…properly designed environmental standards can trigger innovation that may partially or more than offset the costs of complying with them” (cited in Bernauer et al). It means that the environmental regulation does not bring any problems, on the contrary it brings new opportunities. Innovation survey that has been held in Germany revealed that the outcome depends on the field regulation is applied in. The field of company’s activity plays the decisive role. “Regulations in favor of sustainable mobility contribute to higher sales with market novelties while regulations in the field of water management lower this type of innovation success” “(Bernauer et al). Speaking about price-cost margin of organization, it should be mentioned that many companies can’t comply with the requirements set by the regulation without profit decrease. However, the profit still increases in those organizations, where the resource efficiency is preserved by means of appropriate waste management or recycling “firms with innovations triggered by regulations on recycling and waste management are able to achieve slightly higher price-cost margins which may be attributed to more cost efficient production” (Rennings, p.27). It was clearly determined that environmental policy not only can’t bring any harm but it can even help companies find new opportunities. For example if the organization did not use recycling before and was not aware about its benefits, environmental regulation may simply open its eyes on the opportunities recycling can offer. “The extra tax burden and the shift in investments and output are not profitable for the firm. This cost of environmental regulation is, however, mitigated by three effects: downsizing leads to an upward pressure on prices, modernization leads to a higher productivity of the capital stock, and downsizing and modernization together lead to lower emissions, so that an environmental target can be reached with a lower tax than in the absence of this effect” (Xepapadeas, 1998, P. 168). Main contra argument Environmental regulation can open the eyes of the organization on the new opportunities. This is used as the main argument defending Porter hypothesis, however, this statement can present us also with the main contra argument that should be respected and taken into account. It is based on the question why the companies can’t reveal these opportunities themselves. For example, there are some cases when companies apply the innovation with the purpose of reducing pollution and this innovation makes production expenses lower at the same time. Here the company does not need environmental regulation to introduce innovation. However, the condition is that the company is rather rational and practices strict self-discipline. Certainly, not all the companies have such characteristics thus they need a stimulus to introduce innovation. Moreover, economic crisis played its important role and in many counties the firms do not usually look for new opportunities and benefits in the environmental area: “many countries have little leeway to increase public spending in R&D and other innovation related activities after the global financial crises. Therefore, policies to improve the regulatory framework conditions relevant for innovation or even setting regulation with the explicit objective to promote innovation are becoming more important” (Blind, 2012 p. 3). Conclusion It is possible to come to the conclusion that environmental innovations do not bring any harm and do not influence organizations’ competitiveness negatively. Environmental innovation determined by regulation is as successful as innovation determined by new technical and market opportunities. The literature reviewed testifies that many authors, who researched the issue carefully and by means of case study implementation, support Porter hypothesis. Thus Porter hypothesis can be considered correct. Notwithstanding that the proverb “both the wolves have eaten much and the sheep have not been touched” is often used in ironic context, win-win strategy is possible to be implemented. However, it must be mentioned that not all the fields can benefit from environmental regulation, for example the area of machine building where recycling is possible can certainly only increase its profits and fulfill the requirements imposed by regulation, while transport industry that has to control pollution can lose some profits and its competitive advantage may suffer. Still, despite this fact, many investigations held in order to determine the factors, which can justify Porter hypothesis, proved that win-win situation is possible. The main argument is that environmental regulation very often helps firms open their eyes on the new opportunities environmental innovation can bring. The financial gains received from these opportunities will cover the costs spent on the requirements fulfillment. Moreover, it is essential to mention that companies also increase their future competitive advantage if they develop the environmental technology that will bring benefits in future, when other many states start impose and follow strict environmental regulation requirements. References Blind, Knut. (2012).The Impact of Regulation on Innovation. Nesta Working Paper. Retrieved April 12, 2004 from http://www.nesta.org.uk/library/documents/TheImpactofRegulationonInnovation.pdf Ambec, Stefan, Cohen Mark A., Elgie, Stewart, Lanoie, Paul (2011), The Porter Hypothesis at 20. Can Environmental Regulation Enhance Innovation and Competitiveness? Washington, DC Retrieved April 12, 2004 from http://www.rff.org/documents/RFF-DP-11-01.pdf Rennings, Klaus and Rammer, Christian.(n.d.). The Impact of Regulation-driven Environmental Innovation on Innovation Success and Firm Performance Retrieved April 12, 2004 from ftp://ftp.zew.de/pub/zew-docs/dp/dp10065.pdf Xepapadeas, Anastasios, de Zeeuw, Aart. (1998). Environmental Policy and Competitiveness: The Porter Hypothesis and the Composition of Capital Department of Economics and CentER, Tilbulg Unirwsity, P.O. Retrieved April 12, 2004 from http://arno.uvt.nl/show.cgi?fid=79224 Bernauer, Thomas, Engels, Stephanie, Kammerer, Daniel and Seijas, Jazmin (n.d.) Explaining Green Innovation. Ten Years after Porter’s Win-Win Proposition: How to Study the Effects of Regulation on Corporate Environmental Innovation? Center for Comparative and International Studies Retrieved April 12, 2004 from http://www.cis.ethz.ch/publications/WP_17_GreenInn.pdf Read More