Win–win opportunities and environmental regulation: testing
of porter hypothesis for Indian manufacturing industries
, S. Kumar
Institute of Economic Growth, Delhi University Enclave, Delhi 110007, India
Received 5 June 2002; revised 12 August 2002; accepted 3 September 2002
This paper studies the effect of environmental regulation on the productive efﬁciency of water polluting industries in India. The panel data
of 92 ﬁrms belonging to sugar industry of India during the period 1996–99 are used to test the Porter hypothesis of having win– win
opportunities for the ﬁrms subjected to the regulation. The main empirical result is that the technical efﬁciency of ﬁrms increases with the
degree of compliance of ﬁrms to the environmental regulation and the water conservation efforts there by supporting the Porter hypothesis.
q 2002 Elsevier Science Ltd. All rights reserved.
Keywords: Environmental regulation; Porter hypothesis; Win– win opportunities
Environmental regulation makes ﬁrms internalize the
costs of environmental externality generated by them. It
may result in ﬁrms complying with the regulation being less
competitive in the market than the non-complying ﬁrms.
This conventional view about the effects of regulation on the
competitiveness of ﬁrms is recently subjected to scrutiny
especially in the context of empirically testing the so called
Porter hypothesis (Porter, 1990a,b, 1991). Porter and van
der Linde (1995) argue, that properly designed environ-
mental standards can trigger innovation that may partially or
more than fully offset the costs of complying with them.
Such ‘innovation offsets’, as one can call them, can not only
lower the net costs of meeting environmental regulations,
but even lead to absolute advantage (p. 98). The authors
further contend that innovation offsets occur mainly because
pollution regulation is often coincident with improved
efﬁciency of resource usage and the inference is that stiffer
environmental regulation results in greater production
efﬁciency. Many economists (for example Palmer et al.,
1995) remain skeptical of the widespread existence of this
hypothesis or such ‘win–win’ opportunities. Although,
Palmer et al. clearly do not accept the basic arguments of the
Porter hypothesis, they do agree that environmental
regulation and production efﬁciency may be related.
According to them, ‘we acknowledge that regulations
have sometimes led to the discovery of cost saving or
quality improving innovation; in other words, we do not
believe that ﬁrms are ever vigilantly perched on their
efﬁciency frontier’. However, they indicate that more
systematic studies are needed to establish the extent of the
effect. Indeed, the empirical literature on the relationship
between environmental regulation and production efﬁciency
is still rather scarce. The objective of this paper is to study
the effect of environmental regulation relating to water
pollution by the manufacturing industry in India on the
productive efﬁciency of ﬁrms. The panel (time series-cross-
section) data of 92 water-polluting ﬁrms for three year
period 1996 –99 are used to test the Porter hypothesis.
There are three major approaches used in the literature to
measure the effect of environmental regulations on the
production efﬁciency of ﬁrms:
(i) adjusting the output of the plant to account for the
marginal beneﬁt or cost of the emission reduction or
the shadow prices of pollutants (Pittman, 1981, 1983;
Fare et al., 1993; Hetemaki, 1996; Coggins and
Swinton, 1996; Repetto et al., 1996; Kumar, 1999;
Murty and Kumar, 2000);
0301-4797/03/$ - see front matter q 2002 Elsevier Science Ltd. All rights reserved.
Journal of Environmental Management 67 (2003) 139–144
Corresponding author. Tel.: þ91-11-266-7101/7365/7068; fax: þ 91-
E-mail address: firstname.lastname@example.org, email@example.com (M.N. Murty).