The Porter Hypothesis and Regional Innovation Clusters
Environmental regulation can enhance innovation and competitiveness. This is the essence of the so-called Porter Hypothesis, developed by Michael Porter, head of the Institute for Strategy and Competitiveness at Harvard University.
I find in Porter's words a broader statement still: Competitiveness is enhanced by differentiation in social or ecological assets or circumstances, including regulations.
First the regulatory stuff. From Porter and Claas van der Linde, “Toward a New Conception of the Environment-Competitiveness Relationship,” Journal of Economic Perspectives, 1995:
Our central message is that the environment-competitiveness debate has been framed incorrectly. The notion of an inevitable struggle between ecology and the economy grows out of a static view of environmental regulation, in which technology, products, processes and customer needs are all fixed. ...
Detailed case studies of hundreds of industries, based in dozens of countries, reveal that internationally competitive companies are not those with the cheapest inputs of the largest scale, but those with the capacity to improve and innovate continually. …
In this paper, we will argue that properly designed environmental standards can trigger innovation that may partially or more than fully offset the cost of complying with them. ...
If environmental standards are to foster the innovation offsets that arise from new technologies and approaches to production, they should adhere to three principles. First, they must create the maximum opportunity for innovation, leaving the approach to innovation to industry and not the standard-setting agency. Second, regulations should foster continuous improvement, rather than locking in any particular technology. Third, the regulatory process should leave as little room as possible for uncertainty at every stage.
Porter and van der Linde, from “Green and Competitive: Ending the Stalemate,” Journal of Business Administration and Policy Analysis, 1999:
[T]he belief that companies will pick up on profitable opportunities without a regulatory push makes a false assumption about competitive reality — namely, that all profitable opportunities for innovation have already been discovered, that all managers have perfect information about them, and that organizational incentives are aligned with innovating. …
Regulation, although a different type than is currently practiced, is needed for six major reasons:
• To create pressure that motivates companies to innovate. ...
• To improve environmental quality in cases in which innovation and the resulting improvements in resource productivity do not completely offset the cost of compliance; or in which it takes time for learning effects to reduce the overall cost of innovative solutions.
• To alert and educate companies about likely resource inefficiencies and potential areas for technological improvement (although government cannot know better than companies how to address them).
• To raise the likelihood that product innovations and process innovations in general will be environmentally friendly.
• To create demand for environmental improvement until companies and customers are able to perceive and measure the resource inefficiencies of pollution better.
• To level the playing field during the transition period to innovation-based environmental solutions, ensuring that one company cannot gain position by avoiding environmental investments.
Recently, to commemorate the 20th anniversary of Porter's 1991 Scientific American article, "America’s Green Strategy" (see the NYT version "Green Competitiveness"), the University of Ottawa's Sustainable Prosperity research center hosted a symposium, "The Porter Hypothesis at 20." (Links to symposium pages seem not to be working.)
The Chairs' Paper from the symposium (doc) provides a summary of empirical literature on the Porter Hypothesis, examining the links between environmental regulation and: (1) innovation, (2) business performance, and (3) national competitiveness. According to the paper, results are mixed. Context is critical. Some suggest that lag times may be significant. (In his talk, Porter calls the paper "lucid" and "well done.")
From Porter's keynote:
What do we mean by competitiveness?
A problem we’ve had historically in this literature is that our view of competitiveness was frankly wrong. … In those days (the 1980s), many of us thought that competitiveness was actually unit labor costs, and that the lower your unit labor costs were, the more competitive you would be. Many people thought that competitiveness was driven by the value of your currency, and if you had a low currency, that made you competitive. We still hear that today.
What came to be understood as competitiveness was actually productivity – the productivity with which a nation, or a region, utilizes its resources: its capital, its people, and also its natural endowments.
Access to the endowment does not make you competitive. It’s utilizing the endowment to produce valuable goods and services.
An example Porter gives of clusters and competitiveness is the Spanish wind energy industry (slide #7, pdf). In this case, environmental regulations such as feed-in tariffs played a significant role in boosting industrial productivity.
Other examples are culturally or ecologically driven, as in the broader hypothesis I described:
Take GPS systems: Who invented and commercialized that technology? The answer is the Japanese. …
Why did the Japanese commercialize and do all the innovation to make GPS work? The answer is: There are no house numbers. To find a home or office building in Tokyo, you have to know where it is. … So who had the greatest demand signal that GPS would be really important? It was the Japanese.
Why are Israelis the world leader in drip irrigation technology? Because they have no water.
Can these understandings of competitiveness inform economic development strategies around the U.S.?
The Obama Administration is promoting the development of regional innovation clusters through the U. S. Economic Development Administration (EDA); and Harvard's Institute for Strategy and Competitiveness, headed by Porter, has received a $1 million EDA grant to analyze regional assets through a Cluster Mapping Project.
• Martin, R. and P. Sunley. 2003. "Deconstructing clusters: chaotic concept or policy panacea?" Journal of Economic Geography 3:5-35.
• Sallet, J., E. Paisley and J. Masterman. 2009. "The Geography of Innovation: The Federal Government and the Growth of Regional Innovation Clusters." Science Progress.
• Muro, M. and B. Katz. 2011. "The New 'Cluster Moment': How Regional Innovation Clusters Can Foster the Next Economy." Brookings Institution.