Linking Induced Technological Change, Competitiveness and Environmental Regulation: Evidence from Patenting in the U.S. Auto Industry

Abstract

This article examines firms’ innovation activities in response to U.S. technology-forcing auto emissions standards enacted between 1970 and 1998. Patent applications in automobile emission control technologies were used as a measure of firms’ innovative responses to regulatory pressures. In addition, we extensively studied secondary literature and industry specific records and conducted targeted interviews with experts involved in the development. Findings of this study provide new evidence that supports the Porter hypothesis: the performance based technology-forcing auto emissions regulations induced technological innovation and led domestic U.S. firms to become relatively more innovative when compared to their foreign rivals. Overall, this study suggests that proper technology-forcing regulations have the potential to induce technological innovation, in particular radical innovation. Findings also imply that domestic firms may establish competitive advantage over rival firms by reacting proactively in the early phase of the regulatory era.