Environmental Engineering Reference
In-Depth Information
technology to reduce pollution would bene
rst movers to
comply with regulation (Porter, 1990; Porter and van den Linde, 1995a; 1995b).
The Porter hypothesis could be described as having both a weak and a strong form.
Porter himself discusses only the weak form, essentially that regulation, properly
designed, can cause the (regulated)
fi
t economically by being
fi
rm to undertake innovations that not only reduce
pollution - a hallmark of production ine
fi
ciency - but also save on materials, water and
energy costs, conferring what Porter calls 'innovation o
ff
sets' to the innovating
fi
rm. This
can occur because the
fi
rm,at any point in time, is sub-optimal. If the
fi
rm is the
fi
rst to
move by complying in an intelligent way, other
rms will later have to rush to comply
and do so in a less thoughtful and more expensive way. Thus there are 'learning curve'
advantages to being
fi
fi
rst and early. Porter argues that in the international context,
fi
rst-
mover
t by being subjected to a national regulatory system slightly ahead of
that found in other countries. The strong form of the Porter hypothesis was not put forth
by Porter at all. It (and the weak form as well) was
fi
rms bene
fi
fi
rst proposed by Ashford and his col-
leagues at MIT (Ja
e et al. 1995) after years of cross-country and US-based studies that
showed that stringent regulation could cause dramatic changes in technology, often by
new
ff
rms or entrants displacing the dominant technologies. The replacement of domi-
nant technologies by new entrants, rather than incremental change by existing technol-
ogy providers, has been the source of the most important radical innovations this
century.
MIT research found paradoxically that the only government policy that a
fi
ected inno-
vation was health, safety and environmental regulation, not strategies devised by govern-
ment as a part of its industrial policy. Moreover, the e
ff
ects of regulation on innovation
turned out to be positive, not negative as expected by the conventional wisdom at that
time. Stringent regulation could stimulate entirely new products and processes into the
market by new entrants with the displacement of dominant technologies rather than the
transformation of technologies by existing
ff
rms. One of several vivid examples is the dis-
placement of Monsanto's PCBs in transformers and capacitors by an entirely di
fi
ff
erent
dielectric
uid pioneered by Dow Silicone. Regulation can thus encourage disrupting
innovations by giving more in
fl
uence to new 'value networks' or 'customer bases' in which
demands for improvements in both environmental quality and social cohesion are more
sharply de
fl
ned and articulated. Of course, industries that would fear disrupting new
entrants would not be expected to welcome this regulation. This explains in part their
resistance to regulation and their propensity to try to capture regulatory regimes, surrep-
titiously or through direct negotiation (Caldart and Ashford, 1999).
In principle, regulation can be an e
fi
ective and proper instrument for government to
guide the innovation process. Well designed, regulation that sets new rules changes the
institutional framework of the market and can be an important element in creating favor-
able conditions for innovation. This enhances environmental sustainability and creates
incentives for the development of powerful lead markets which pull innovation towards
that sustainability. With regard to regulation, what seems to matter is not only the strin-
gency, mode (speci
ff
cation versus performance), timing, uncertainty, focus (inputs versus
product versus process) of the regulation, and the existence of complementary economic
incentives, but also the inherent innovativeness (usually in new entrants) or lack of it
(usually the regulated
fi
rms) (Ashford and Heaton, 1983; Ashford et al., 1985). The
importance of new entrants is missing in the analysis o
fi
ff
ered by Porter.
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