Environmental innovations and profitability: how does it pay to be green? An empirical analysis on the German innovation survey

• We contribute to the debate whether it pays to be green.
• We propose a differentiation between typologies of Environmental Innovations (EI).
• Energy and Resource Efficient Innovations engender positive profitability effects.
• Externality Reducing Innovation hamper firms' profitability.
• The motivations driving the adoption of EI moderate their profitability gains.

Much of the empirical literature analysing the relation between environmental innovation and competitiveness has focused on the question whether “it pays to be green”. We differentiate between different types of environmental innovations, which will be disentangled in those aiming at reducing the negative externalities and those allowing for efficiency increases and cost savings. What we analyse is at first the extent to which these two typologies have impacts on firms' profitability with opposite signs, and, secondly, whether the motivations driving the adoption of those innovations make the difference in terms of economic gains. We find empirical evidence that both the typology of Environmental Innovation and the driver of their adoption affect the sign of the relationship between competitiveness and environmental performance. Innovations leading to a reduction in the use of energy or materials per unit of output positively affect firms' competitiveness. Contrarily, externality reducing innovations hamper firms' competitiveness. The empirical strategy is based on a sample of German firms and makes use of a merge of two waves of the Mannheim Innovation Panel in 2011 and 2009 that allow overcoming some endogeneity issues which may arise in a cross-section setting.