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Driving eco-innovation: New insights from the UK



British researchers shed new light on what drives some companies more than others to pursue eco-innovation. The findings are instructive to policy makers and business leaders alike.

In recent years, more and more manufacturing firms have turned to eco-innovation to reduce their environmental footprint and save material inputs. In the UK alone, business expenditure on research and development (R&D) for eco-innovation in 2009 was around £100 million (€115 million). A typical account of what drives firms to take such steps might focus on growing consumer expectation for environmentally friendly goods, or companies’ self-imposed environmental standards brought about by rising energy and material costs. Another explanation is that with increasingly stringent regulations being imposed by governments, manufacturers are realising the competitive advantage of being the first to apply eco-innovations.

But, to judge the effectiveness of one driver of innovation over another, you have to look at the level of investment each typically results in. What does it imply about the value of environmental regulation, say, if some firms respond to it with only meagre investment? Furthermore, what particular characteristics of firms themselves, if any, determine their decision to pursue eco-innovation more than others?

As is frequently the case for researchers pursuing these types of questions, their ability to find answers is limited by the availability of good data, such as reliable measurements of eco-innovative activity. One promising source, however, is the ’Government survey of environmental protection expenditure by industry,’ published annually by the UK Department for Environment, Food and Rural Affairs (Defra). The survey gathers firm level data on environmental protection expenditure across industrial sectors in the UK.

For researchers at the Nottingham Business School, this survey represents a valuable resource for testing some of the prevailing theories on the drivers of eco-innovation. A recent study ‘On the drivers of eco-innovations: empirical evidence from the UK’ uses 2006 survey results to show how three drivers of eco-innovation – public demand for corporate responsibility; voluntary environmental management systems; and environmental regulation – differ in their impact on the investment choices of manufacturing firms in the UK.

By popular demand

The study first looks at the influence demand factors exert on the decision making of firms. A large body of research points to the critical role that societal pressures play in pushing firms toward more ecologically sound products and services and better corporate social responsibility (CSR).

The report, however, shows that in response to public demand ‘firms may undertake only the minimum investment in eco-innovation so as to legitimise their practices and improve their “green” image.’

While some demand factors do affect the decision of firms to initiate eco-innovations, the researchers found that these have no statistically significant impact upon their level of investment in this area. To encourage firms to commit larger amounts of resources to eco-innovation, other drivers need to be considered more closely.

Managing what you measure

Environmental management systems are the second potential driver of innovation examined. These are voluntary tools which businesses use to help evaluate and improve their own environmental performance in a systematic and documented manner.

A primary example is the European Commission’s Eco-Management and Audit Scheme (EMAS). EMAS helps participating companies comply with certain environmental standards and encourages leaner, more eco-friendly production.

The Nottingham study shows that firms which have adopted systems such as the EMAS are far more likely to invest in eco-innovation R&D. A possible explanation for this, according to the authors, is that ‘firms that build better organisational capabilities accumulate the necessary soft skills that enable them to initiate environmental research and development activities.’

The role of regulation

Then there is the question of regulation. Its role in driving eco-innovation is recognized in the so-called ’Porter Hypothesis’, which holds that the stringency of environmental regulations can induce efficiency and spur innovation within firms. These innovations, it is argued, provide firms with a competitive advantage over later adopters.

The Nottingham study offers some nuance to this theory. It found that the stringency of environmental regulations affect firms differently according to their pre-existing levels of innovation. For firms at the top of the innovation scale, those that are ahead of their peers in applying state-of-the-art technology and processes, regulation was not a key factor in their investment in eco-innovation. These firms already have achieved a level of eco-innovation that enables them to meet a higher level of compliance, independent of regulatory incentive.

On the other hand, environmental regulation was found to stimulate investment in R&D in firms that have not yet achieved such a high level of innovation. These firms need the incentive of regulations to make the necessary investments in eco-technology and systems, which allow them to meet the higher standards.

Policy implications

The Nottingham study’s findings compliment the results of DG Environment’s own investigation into the drivers of eco-innovation, presented in their 2011 Eurobarometer survey, ‘Attitudes of European entrepreneurs to eco-innovation.’ The report, which analysed data taken from interviews with over 5,000 managers of small- and medium-sized companies across Europe, found that management capabilities within enterprises, as well as good access to external information, knowledge, and technology support services, were among several drivers of eco-innovation considered important by entrepreneurs. Existing regulations and standards, as well as expected future regulations, were also reported as important drivers of eco-innovation.

The Eurobarometer survey also presents findings on the barriers to eco-innovation. These findings shed further light on the influence that demand plays, particularly when it is perceived absent. According to the report, the most serious obstacle preventing businesses from pursuing eco-innovation is ‘uncertain demand from the market.’

One way that policy makers, then, may have a role in boosting eco-innovation is through demand-side measures such as green public procurement. By enlarging markets for environmentally friendly products, public procurement provides authorities with considerable leverage in helping move eco-products into the mainstream, and can help send unambiguous signals to manufacturers.

Through these schemes, producers have greater incentive to innovate since not doing so means exclusion from public sector contracts. According to Commission figures, public purchasing in the EU amounts to a total of 17% of EU gross domestic product, and the total share of public purchases in some industries reaches 50%.

Still, the Nottingham study clearly shows that while demand factors do spur eco-innovation in some industries, the presence of environmental management systems and environmental regulations are far more important in driving sustained investment in this area. Given these new insights, the challenge for public authorities will be finding the proper balance between demand-side measures, regulation, and sufficient provision of platforms for environmental management.

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