Environmental protection, innovation and price-setting behavior in Spanish manufacturing firms

In this paper, we analyze the effects of environmental protection regulation on process and product innovation decisions and their impact on price-setting behavior in Spanish manufacturing firms throughout 2009-2014. To this end, we estimate several discrete choice probit models using firm-level data. Our results show a positive relationship between the existence of environmental regulations (environmental expenditures as a proxy) and innovation. However, the magnitude of the effects and their significance depend on the type of innovation and the size of the firms: environmental regulation positively impacts process innovation only in large firms (> 200 workers) while it positively impacts product innovation exclusively in small firms (up to 200 workers). Taking into account innovation activities, we additionally explore the behavior of product prices. We obtain that process innovation increases the probability of reducing prices for both small and large firms; while product innovation only raises the likelihood of increasing prices for the former. Finally, we look into the determinants of investment in environmental protection and find a positive impact of environmental regulation.