Exports can speed Europe’s environmental innovation

Europe's Green Deal provides a roadmap for a green economic transition. However, the deal's architects recognise that not all member states are equally capable of bringing their companies up to international best practice. A cornerstone of the Deal is economic and environmental convergence - companies catching up with the latest production techniques, which in turn have a smaller environmental footprint. The ability of businesses to adopt green technologies is a lynchpin of the sustainable economy.

Firms’ export activity can help firms to adopt EI through learning-by-exporting, regulation-push and demand-pull mechanisms (De Loecker 2007; Horbach 2008). To shed light on the interface between trade and the adoption of EI, we use data for more than 23,000 firms located in European countries at different stages of development. The sample includes firms from Eastern Europe (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Romania and the Slovak Republic). The remaining firms are located in Germany, Italy and Portugal, Greece and Cyprus. We extract the database from the harmonised European Community Innovation Survey (CIS) waves 2008 and 2014 provided by Eurostat. The firms analysed have recently introduced an innovation that was - at least - new to the firm. The analysis examines the drivers of EI, which is understood as an innovation that leads to a reduction in the environmental impact of consumption or production activities (Kemp and Pearson 2007).

At the most basic level, we divide innovation into two broad categories - three areas of EI related to products (product innovation) and five areas of EI related to the processes by which products are produced (process innovation). An example of the latter is adjustments made by the firm to its manufacturing processes, which reduce polluting by-products such as water pollution and CO2 emissions. Other process innovations include the introduction of recycling for materials, waste and wastewater. Product innovations are closer to the consumer - and the end use of the product. One example is a more energy-efficient fridge.

Exports accelerate environmental catch-up in Eastern European Europe

Looking at the breakdowns of the data for these 14 countries, we find that, on average, Eastern European firms can be described as environmental laggards due to lower EI adoption rates compared to firms in the broader data. In percentage terms, only 54.8% of Eastern European firms report at least one EI, compared to 68.6% in the full data set.

Previous research shows that exports can be a catalyst for managers to learn from international best practices (De Loecker 2007).  In this way, firms can gain access to important knowledge that allows them to adapt their production technologies. Access to this international knowledge may also help underpin the firm's decision to adopt EIs. This is because these innovations are often associated with the most advanced knowledge - that which lies beyond the knowledge frontier (De Marchi 2012). For firms operating in catching-up countries, the distance to this frontier may seem very far. But trade with Europe has become easier in recent decades. Some economic borders - such as those within the EU bloc - have become highly permeable. And trade links, even across political and economic blocs, act as channels - not just for products - but for ideas and improved ways of making products.

In this context, it is not surprising that when we compare Eastern European exporters with their non-exporting counterparts, we find that the former are much more likely to adopt technologies with a positive environmental impact (54.8% vs. 37.9%). However, this simple comparison does not take into account other characteristics of these firms. But exporters and non-exporters are different in many other ways. For example, exporters are systematically larger than non-exporters, highlighting the need to control for differences in the size of these internationalised firms when making comparisons. Accordingly, we control for systematic differences such as firm size, access to subsidies, domestic environmental regulation and ownership status in the empirical study of trade and environment in these 14 countries.

Figure 1 illustrates the derived probability of a firm introducing an EI as a function of its export status, which we have divided into three categories: no exports, some exports, and those exports that generate the largest share of foreign markets. The two graphs at the top show the probability of a firm adapting its production technology to reduce its environmental footprint (process innovation). The two lower graphs focus on the extent to which firms adopt these process-based EIs, which vary between zero and five per cent. By splitting EI into process-based and product-based innovation, we take into account the very different characteristics of each type of innovation.

Switching to exporting significantly increases the likelihood of adopting an environmentally beneficial process innovation (4.8 percentage points more likely). For the most intensive exporters, the effect increases to 5.4 percentage points. Given the relatively low adoption rates in Eastern European countries, these results are statistically and economically significant. An interesting point is the magnitude of the adoption rate, which increases with the export rate. In Eastern European countries, highly internationalised firms are predicted to adopt 1.89 more process-based EIs, compared to a baseline of 1.6 for non-exporters. The total increase is 18.1%.

Such patterns are not observed for product-based EI, even for the relatively wealthier countries in the sample. The differences in the results for process- and product-based EI point to trade-induced learning-by-export, which improves a firm's environmental performance in production but does not necessarily lead to cleaner final products.

Exposure to more environmentally regulated foreign markets induce firms to adopt EIs

In addition, we show that, regardless of a firm's origin, exposure to importing countries with high market-related environmental policy stringency is associated with higher EI adoption rates. Market-related environmental policy stringency is particularly important because it takes into account taxes and charges levied on inputs or outputs of a production process. This has a direct impact on competition as it is based on the scale and hence the cost-effectiveness of production. To remain competitive, exporters need to improve their competitiveness, e.g. by adopting EI. The latter relationship between exposure to environmental regulation and EI adoption can be seen for both product and process-based EIs. Moreover, the relationship is largely independent of a firm's origin. A strong demand for sustainable production and products from foreign stakeholders, as well as generally higher environmental standards, may explain the result.

Policy implications

Accelerating the diffusion of clean technologies is one of the pillars of the European Green Deal and is crucial for its success in paving the way for a green transition. Our main findings suggest that the cornerstone of the European Union, the European Single Market, offers significant scope for the environmental efficiency of firms in Eastern Europe. Independent of the firm's country of origin, exports to environmentally stringent countries increase the adoption of EI. Accordingly, firms should be helped to adapt their products and processes to the requirements of the most stringent and critical stakeholders.

Recently, globalisation and trade have come under scrutiny. While the complex relationship between trade and the environment is beyond the scope of a single study, our findings show that the debate is more nuanced than it appears at first glance. It is important for policymakers to consider the negative environmental consequences of trade, for example by designing tariffs to take account of emissions-intensive production. However, it is important not to lose sight of the positive aspects of trade, including its ability to trigger convergence in environmental standards.

The research summary is based on:

Aoife Hanley & Finn Ole Semrau (2022) Stepping up to the mark? Firms’ export activity and environmental innovation in 14 European countries, Industry and Innovation, DOI: 10.1080/13662716.2021.2021865

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