A Critical Review of the Porter Hypothesis and Business Innovativeness – A look into Duan and Xia's (2020) empirical study of Cities in China

13. 4. 2022
Štítky

Understanding the impact of government action on firms' innovativeness and willingness to adopt new and emerging technology relies heavily on cross-discipline theoretical analysis. The quest exposes multiple theoretical cross-references that could provide valuable insight to crafting viable solutions.

One such theory is the Porter Hypothesis, while narrow in scope, is valuable in principle. Thus, academics need to understand the conditions for effective environmental regulative actions and the impact on business innovativeness and performance. The field of business, innovation, sustainability, and growth requires deep understanding through related theories and cross-referencing of valuable principles to craft effective solutions to an area of constant concern.

Research question:

Is the Porter Hypothesis a viable contributory cross-disciplinary theory to understanding implications of government regulatory action on adopting new technologies in the business environment?

 


 

In the search to understand any academic phenomenon, it is critical to decipher the similarities between theory and practice. Through this quest for knowledge, academia challenges new and existing ideologies and concepts of social sciences relating to Business, Innovation, Sustainability, and Economics. Notwithstanding the underlying goals of drawing inference against theory and practice, academia provides thought-provoking conceptualizations and reasons for further in-depth research. However, to have an equilibrium of understanding relating to the implication of government actions on the decision of businesses to adopt new and emerging technologies across theory and practice, cross-discipline studies are necessary. Authors often cross-reference the Porter Hypothesis as a relative touchpoint principle for relating research. The Porter Hypothesis insinuates that efficiently crafted environmental regulation benefits companies by encouraging innovativeness and bolstering competitiveness, which offsets all or some costs concerning regulatory compliance (Sustainable Prosperity, Policy Brief, 2015). 

From a conceptual base, the Porter Hypothesis argues that once the regulations are proper, companies benefit from the innovation effect. The theory claims these gains come through signaling resource gaps and opportunities, improving awareness, reducing risk and uncertainty, and conquering organization inertia (Sustainable Prosperity, Policy Brief, 2015). Consequent to the critical review of works on the subject, the study brings the three forms of the Porter Hypothesis to the forefront. The theory has a weak, strong, and recently acknowledged narrow form. The weak form argues that well-fabricated regulations improve innovativeness, the strong form indicates rules improve business performance, and the latter assimilates that those regulations that are flexible, stringent, and lack risk are likely to encourage firms to innovate creatively. However, both current and earlier research on the topic adopts either the weak or narrow form of the Porter Hypothesis. Furthermore, the weak form finds more empirical support than the narrow, while the debate rages among academia regarding the next steps for the strong form. Notable; however, the theory does not advocate that environmental regulation benefits all regulated firms. There are instances where firms that fail to innovate or meet compliancy leave the market, which opens up an opportunity for existing and new competition. 

A contributing study to the holistic framework of Business, Innovation, Sustainability, and Economics is the potential cross-reference of Duan and Xia's (2021) scientific article published in the International Journal of Environmental Research and Public Health in 2022 Molecular Diversity Preservation International (MDPI). The article "Does Environmental Regulation Promote Environmental Innovation? An Empirical Study of Cities in China" was produced in December 2021 and copyrighted in the same year by authors. Additionally, the research paper is an open-access article under the Creative Commons Attribution license. According to Google Scholar and MDPI, the report recorded more than six-hundred and fifty (650) abstract views and more than four-hundred and fifty (450) full-text views up to scientific review. 

 

Business Innovation

 

The article's structural base explores the conceptual strategy of the research as it moves into the theoretical background of the Porter Hypothesis, the economic and environmental conditions of the cities in China. After which, the study flows into the methodology where the authors explain the use of the spatial econometric model to expound on the relationship between environmental regulation and urban innovation. This spatial model further aggregates measuring the levels of environmental regulations in China through literary concepts indicating regulation indicators such as ecological governance expenditures on relating policy frameworks, emission expenditures, and input-output analysis framework. The methodological approach uses a comprehensive index of environmental regulatory intensity indicators, namely, the utilization rate of industrial solid waste, domestic sewage treatment rate, and domestic waste treatment rate. To bring these indexes together, the authors use the extreme value method to standardize the treatment rate of the pollutants. They account for the differences in the discharge pollutants by city, inclusive of the weighted average treatment rates, to identify the intensity of government regulation. The authors then explain the measurement of innovation using the context of green innovation sustainable innovation. To define innovation, the author uses four other innovation categories covering environmental innovation indicators input through research and development investment (patents), and lastly, focusing on the innovative patents for applications and process improvements that relate to ecological innovation. Through this framework, the authors explore the results and provide analysis of the findings from the Random Effects and the Spatial Regression models.

There are two literary authors of the article, Duzhong Duan and Qifan Xia. Duan D., according to the author's bibliographic statistics, is affiliated with the Institute of Global Innovation and Development, East China University, and Louisiana State University. The author has multiple citations with seven (7) published articles, including co-authorships. These articles cover business, geographic innovation, transport geography, growth and development, sustainability, economics, and environmental sciences. Qifan Xia, bibliographic data provides more sources on a collaborative (co-author) premise in similar studies with no identifiable individual publications. However, the primary article focuses on breaking the academic divide among scholars to remove from the binary opposition between the theories of Porter and the Repression hypothesis. Citing that within academic circles, there is no conclusive note that enterprises respond to government regulation and that supposed relationship between environmental law and innovation (Duan & Xia, 2021). 

The benefit of the article is that it contributes and effectively enriches literature that cross-references patent information to measure innovation (environmental). Secondly, the study adds to the literary context of the relationship between regulation and innovativeness, ecological or otherwise. The publication focuses on the spatial econometric model's experiments to explain the interconnectivity between urban regulation and environmental innovation. What is evident is that this approach is different from the majority of previous methods and adds to the mix of methodologies applied by scholars in measuring the two paradigms such as the input-output analysis method, as the case with Song and Yu (2018) and Lijiang et al., (2022). Other scholars use alternate indicators to measure innovation capabilities, like Ardito et al. (2019). However, some use a qualitative approach such as the institutional theory, as with Eunmi (2020). Eunmi (2020), in their qualitative approach, argues that the Porter Hypothesis enthusiasm because it works in contradiction to the ideologies that ecological protection is detrimental to financial and economic growth and invokes businesses to accept regulations and seek to benefit from them. The underlying basis for the study is similar to all relating articles as they strive to provide clarity to the relationship between technological change and policy, especially in the environmental sphere of Porter's Theory. Duan and Xia (2021) fall within the new development realm in the idea as the article purports to focus on the enhancing effects.

Intriguingly the study examines the relationship through the lens of patents to measure ecological innovation and Moran's index to analyze the spatial correlation. This methodology is viable because it provides a different view versus simple innovation but creativity. Concurrently, the approach limits the application of technology and innovation in environmental enhancements as there are external technological processes that support innovativeness. The research output includes an indication of spatial relevance with a significant level of 1%. While this is viable in one aspect, it does have notable weaknesses. For example, using the patent application as the definition for innovativeness is narrowing in scope and ignoring the process, product, and people innovation activities beyond patent requirements. Secondly, using one data source for patent data is limiting to the data as multiple sources exist locally and internationally, which could skew the Wanfang Database's practical relevance.  

Efficiently, the author's application of the Random Effects and the Spatial Durbin Model (SDM) shows a U-shape relationship between regulation and innovation which coincides with the Porter Hypothesis. This output does provide credence to previous and current research that claims there is the existence of the weak form of Porter Hypothesis. At the same time, it thoroughly answers one aspect of the Porter Hypothesis while inadequately addressing the strong form. The singularity of its scope identifies that the resource-saving element of eco-innovation and the means to increase firm performance appears more opinion than empirical fact. The collated data from cities in China provides sufficient evidence of such a reality and gives reasonable grounds for applicable arguments. Duan and Xia's findings are comparable to Leeuwen and Mohnen's (2017) as they also describe the Porter Hypothesis narrowly across process integrated eco-innovations in the Netherlands. While the methodology is fundamentally different, there is a strong indication of the weak form of the hypothesis. Citing there is a positive contribution of environmental regulatory actions on eco-innovations and, on that premise, increases the general propensity to increase ecological innovations (Leeuwen & Mohnen, 2017). They were able to corroborate the existence of the strong form of the Porter Hypothesis, unlike Duan and Xia (2021). Another critical consideration is the possibility of external eco-system impacts that could drive business innovation, such as un-patented innovative activities by competitors not linked to regulatory requirements. 

The requisite findings in Duan and Xia's (2021) study align with the positive relationship theories. These findings defend one extreme of the Porter Hypothesis, where regulatory actions contribute to innovativeness but counters with high costs. Moreover, Duan and Xai's (2021) research shows a cost reduction possibility from innovation; it doesn't give enough credence to say the narrow form exists but implies overtime performance is possible to some degree. Still, the same appears to be the case of studies that explore the weak form, and for the others, there needs to be a greater understanding or more suitable application of analysis models. The study is particularly valuable because it provides insight into the highly debated topic of environmental regulation and innovativeness and which version of the theory is dominant and adds value to competitiveness and financial growth. This study, in particular, supports the weak form and aligns strict policies that drive innovation through a positive relationship with a relatively significant correlation. 

The study presents data that helps provide direction for future research through results. Critically, the study does not explore Porter's Hypothesis in detail given the limited lens and the redacted definition of innovation, leading to the following questions. Under what circumstances can non-compliance with regulations offset the cost of innovation? Why is there a belief that firms have to be coerced into adopting technologies versus adopting technology that provides value and meets the objective whether environmentally, financially, or competitively? Also, how do policymakers design suitable regulations to induce or encourage innovation, much less to diffuse it? These questions form the basis for opening the minds of academics to understand how the Porter Hypothesis can collaboratively create a win-win situation for policymakers and businesses. Consequently, the findings by Duan and Xia (2021) show that the Porter Hypothesis adds insight to other studies of relating impact but at the pivotal point where an increase in practical and applicable evidence along all forms is necessary.

Author: Darren Fisher

Bibliography

Ardito, L., Petruzzelli, A. M., & Peruffo, E. (2019). Inter-firm research and development collaborations and green innovation value: the role of family firms' involvement and the moderating effects of proximity dimensions. Business Strategy and Environment, 28, 185-197.

Duan, D., & Xia, Q. (2021, December). The article Does Environmental Regulation Promote Environmental Innovation? An Empirical Study of Cities in China. International Journal of Environmental Research and Public Health, 19(1), 139.

Eunmi, L. (2020). Environmental Regulation and Financial Performance in China: An Integrated View of the Porter Hypothesis and Institutional Theory. Sustainability, 12(10183).

Leeuwen, G., & Mohnen, P. (2017). Revisiting the Porter hypothesis: an empirical analysis of Green innovation for the Netherlands. Economics of Innovation and New Technology, 26(1-2), 63-77.

Lijiang, J., Xiaoli, H., Zhongwei, Z., Bin, H., & Weiming, L. (2022, January). How Environmental Regulation, Digital Development, and Technological Innovation Affect China's Green Economy Performance: Evidence from Dynamic Thresholds and System GMM Panel Data Approaches. Energies, 15(884).

Song, W., & Yu., H. (2018). Green Innovation strategy and green innovation: the roles of green creativity and green organizational identity. Corporate Social Responsibility and Environment Management, 25, 135-150.

Sustainable Prosperity, Policy Brief. (2015, November). Environmental Regulation and Innovation: Select case study evidence of the Porter Hypothesis. Retrieved 2022 March, from Smart Prosperity Institute : https://institute.smartprosperity.ca/sites/default/files/publications/files/Porter_1.pdf

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