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Porter Hypothesis
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Porter Hypothesis

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The debate on the relationship between environmental regulation and competitiveness has been a topic of discussion for a number of years now.

As early as 1991, the American economist Michael E. Porter proposed that stringent environmental regulation (under the condition that it is efficient) can lead to win-win situations, in which social welfare as well as the private net benefits of firms operating under such regulation can be increased.

According to the Porter Hypothesis, strict environmental regulations can induce efficiency and encourage innovations that help improve commercial competitiveness.

Michael Porter is the founder of a nonprofit organization called the Initiative for a Competitive Inner City and one of the founders of The Monitor Group. His main academic objectives focus on how a firm or a region can build a competitive advantage and develop competitive strategy. Michael Porter currently leads the Institute for Strategy and Competitiveness at Harvard.

The hypothesis suggests that strict environmental regulation triggers the discovery and introduction of cleaner technologies and environmental improvements, the innovation effect, making production processes and products more efficient. The cost savings that can be achieved are sufficient to overcompensate for both the compliance costs directly attributed to new regulations and the innovation costs.

In the first mover advantage, a company is able to exploit innovation by learning curve effects or patenting and attains a dominating competitive position compared to companies in countries where environmental regulations were enforced much later.  

 

 

 











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