Augmenting the production function with knowledge capital to test the Porter hypothesis: the case of French food industries

We investigate the impact of pollution abatement effort on the economic performances by exploiting a rich panel data set composed of French food industry firms, observed over the 1993-2007 period. We test the Porter hypothesis, assuming that pollution abatement effort has a positive effect on the firm performance by triggering innovation. This is done by estimating a production function augmented with knowledge capital, such a capital being produced by both pollution abatement and R&D investments. Using different estimation methods, including structural semi-parametric ones, we first show than the so-called Porter assumption cannot be rejected when focusing on the full population of French food industry firms since the estimations indicate a positive and significant (though rather small) contribution of the pollution abatement capital to the firm productivity. Then, we consider a more restrictive sample of (potentially) innovative firms, actually engaging both RD and pollution abatement investments. Henceforth, the contribution of pollution abatement capital becomes not significant in regard to the R&D’s one. These results do not support the sometimes invoked hypothesis according to which the positive effect of pollution abatements efforts on firms’ performances is linked to the induced increased innovation. At the same time, the standard hypothesis, assuming that pollution abatement effort significantly decreases the firm performance is always rejected.