Environmental regulatory spillovers, institutions, and clean technology innovation: A panel of 32 countries over 16 years

The empirical literature on environmental regulatory-induced innovation is extensive and finds equivocal results, following the seminal works by Lanjouw and Mody (1996) who show a positive innovation effect and Jaffe and Palmer (1997) who largely find a negative effect of regulations on environmental technology innovation. Yet most of the literature explores domestic regulatory effects on domestic firms’ innovations, while the small amount of studies on cross-border induced innovation is typically confined to a small group of OECD countries. Our departure is to conceive of a global cleantech paradigm whereby domestic firms are induced by foreign country environmental regulations, under the important condition that institutional quality distance between the sending and receiving country is not very far apart. In short, this article demonstrates an important relationship between environmental regulations, institutional quality, and clean technology innovations. Our main hypothesis is that institutional distance moderates the inducement effect of foreign regulations on domestic innovators. To test this hypothesis, we collect a sample of 32 countries, including select OECD countries and the colloquially-named “BRICS” countries. The results of our models suggest there is indeed a significant inducement effect across borders from foreign regulations. These findings are important for both innovators and policymakers. While the former already appear to participate in the global clean technology paradigm, the latter should be aware of the potential ramifications of pioneer regulations for the global clean technology innovation frontier.