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Does environmental regulation indirectly induce upstream innovation?: New evidence from India

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>06/2017
<mark>Journal</mark>Research Policy
Issue number5
Number of pages17
Pages (from-to)939-955
Publication StatusPublished
Early online date31/03/17
<mark>Original language</mark>English


Exploiting a quasi-natural experiment, which involves the imposition of a ban by Germany in 1994 on an input (‘Azo-dyes’) used by the Indian leather and textile industries, we estimate the indirect impact of the environmental regulation on innovation activities of upstream (dye-producing) firms in India and examine how it varies by different firm characteristics: size and ownership. We find robust evidence of a significant increase (11–61%) in innovation expenditure for the dye-makers in response to the ‘Azo-dyes’ ban. Additionally, we find: (i) increase in technology transfer to the tune of 1.2–2.5 times more than that of internal R&D; (ii) increase in innovation expenditure with firm size; (iii) domestic firms investing more in technology transfer as compared to R&D, whereas foreign firms only undertaking the latter and (iv) decrease in investments towards innovation by downstream firms, thereby pointing towards a possible substitution effect in aggregate innovation by upstream firms. Our results are consistent with a variety of estimation methods and robustness checks.