On the green and innovative side of trade competitiveness? The impact of environmental policies and innovation on EU exports

This paper aims at exploring how the export competitiveness of the European Union has been affected by environmental regulation and innovation. Starting from the Porter idea that environmental policies may foster international competitiveness by inducing technological innovation. We test both the strong and narrowly strong versions of the Porter hypothesis, in order to understand if such a virtuous cycle is confined into the environmental goods sector (respecting the narrow criterion) or it spreads out through the whole economic system. For this purpose we adopt a theoretically based gravity model applied to the export dynamics of five aggregated manufacturing sectors classified by their technological or environmental content.When testing the strong version, the overall effect of environmental policies does not seem to be harmful for export competitiveness of the manufacturing sector, whereas specific energy tax policies and innovation efforts positively influence export flows dynamics, revealing a Porter-like mechanism. When testing the narrowly strong version, environmental policies, but more incisively environmental innovation efforts, foster green exports. These results show that public policies and private innovation patterns both trigger higher efficiency in the production process through various complementarity mechanisms, thus turning the perception of environmental protection actions as a production cost into a net benefit.

► We find new evidence in support of both the strong and weak Porter hypotheses, taking a sector based perspective for EU15 over the decade 1996–2007, since environmental and energy taxation does not undermine EU export flows and rather improves them in most observed cases.
► Though sector heterogeneity is emerging as expected, the Porter hypotheses are validated even in the short term effect of regulatory actions.
► Nevertheless, the PH is not to be taken for granted: it is sector-specific, as well as policy instrument-specific.
► Innovation intensity primarily captured by patents shows positive and robust effects over export competitiveness across the whole technological ladder, with a stronger impact on higher technology sectors.
► It is important to avoid overlapping in public actions stimulating innovation through direct and induced mechanisms.