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Environmental regulation, induced innovation, and greener transition: Firm-level evidence

Author

Listed:
  • Kang, Manho
  • Choi, Jaerim
  • Chung, Sunghoon

Abstract

This paper examines the impact of environmental regulations on hazardous chemical use and the role of innovation in firms’ adjustment processes. Using a newly constructed dataset that links firm-level chemical usage with patent activity, we analyze the effects of Korea’s plausibly exogenous chemical safety Acts promulgated in 2015. Our findings show that firms subject to stricter regulations reduced their reliance on hazardous chemicals to comply with the new laws. Innovation plays a crucial role in this transition, facilitating a shift toward eco-friendly practices. Specifically, stricter regulations induced more firm-level innovation, and firms with greater product innovation significantly reduced their hazardous chemical usage. The effect was particularly strong among firms that use hazardous substances as intermediate inputs. These findings demonstrate that well-designed regulation can promote the principles of Green Chemistry, prevention through redesign, by driving innovation.

Suggested Citation

  • Kang, Manho & Choi, Jaerim & Chung, Sunghoon, 2026. "Environmental regulation, induced innovation, and greener transition: Firm-level evidence," Journal of Development Economics, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:deveco:v:179:y:2026:i:c:s0304387825002299
    DOI: 10.1016/j.jdeveco.2025.103678
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    Keywords

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    JEL classification:

    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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