EMPIRICAL DETERMINANTS OF INNOVATION IN EUROPEAN COUNTRIES: TESTING THE PORTER`S HYPOTHESIS

Abstract

This paper is continuous research on the relationship between innovation and productivity

(Tevdovski et al. 2017, Toshevska-Trpchevska et al. 2019; Disoska et al. 2020; Toshevska- Trpchevska et al. 2020, Disoska, 2023). However, this paper tries to go further and capture the

impact of environmental regulation (among other determinants), on the innovation firms’ behaviour in Europe. The main goal of this paper is to test the Porter hypothesis, which suggests that well-designed environmental regulation can trigger firms` technological innovation that helps gain commercial competitiveness (Porter and van der Linde, 1995). Many papers (Jaffe and Palmer, 1997 and Jaffe and al.,1995) support the hypothesis explaining that innovation in pollution-saving technology induces savings in energy, and therefore cost that can offset the cost of complying with them. Nonetheless, the effect varies depending on the sector affected and can be negative in some cases (Kozluk and Zipperer, 2013). In this paper, we try to compare the impact of environmental regulation on innovation and productivity, in different group settings. We use the analytical framework of the CDM model (the acronym of the three authors’ names, Crépon, Duguet and Mairesse, 1998). The model consists of two general stages, and each of them can be divided into two sub-stages. In the first general stage, we estimate the factors that drive firms’ decisions to innovate, as well as innovation investment, using a Heckman correction model. In the second stage, we perform the three-stage least squares (3SLS) methodology to simultaneously estimate the innovation output and the productivity of the firm. This four stages model has led us to gradually observe the determinants of the

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innovation process and their influence over increasing labor productivity in different institutional settings. The data for the econometric model on firm-level data was taken from the Community Innovation Survey (CIS). The CISs represent harmonized surveys aimed at collecting microdata on innovation activities conducted in 2 years from firms belonging to countries that are part of the Eurostat network. In this analysis, we utilize one wave of the CIS survey, namely CIS18 (conducted between 2016 and 2018). We are exploring the impact of innovation on productivity in the observed EU member countries. Furthermore, we would like to see whether there is a positive influence of environmental regulation on the decision to innovate, innovation output, and productivity. The countries are divided into two groups of EU countries – South Europe and Central Eastern Europe and we compare their performances with Germany. The countries representing South Europe are: Greece, Spain and Portugal and countries from Central Eastern Europe included in the analysis are Bulgaria, Czech Republic, Estonia, Croatia, Hungary, Lithuania, Latvia, Romania and Slovakia. The research questions are: 1. How environmental regulation affects the decision to innovate, innovation output, and productivity in different group settings? Is there a significant difference between South and Central Eastern European counties compared to Germany? 2. Does a lower level of innovation in South Europe and Central and Eastern Europe associated with lower environmental awareness among the population or a higher energy intensity in the economy (compared to Germany)? 3. Is Porter’s hypothesis valid in Central and Eastern Europe countries and in South Europe? From the theoretical point of view, we link theory regarding the validity of Porter’s hypothesis and firms’ environmental awareness in two institutional settings. From the practical perspective, we provide practical policy implications.