Is there a trade-off between 'dirty' imports and 'clean' innovation? *

Abstract

Abstract We examine the impact of trade with lower-regulated countries on firms' propensity to engage in 'clean' innovation using a newly constructed data set that combines firm-level international trade data with self-reported innovation data for around 400 Irish companies. We find robust evidence that a higher share of 'dirty' imports from BRIC countries significantly decreases firms' propensity to innovate in 'clean' technologies. A one standard deviation increase in the import share of 'dirty' products decreases firms' propensity to introduce an environmental innovation by up to 8 percentage points. This suggests that importing companies are less likely to respond to environmental policies by developing 'clean' technologies. This also means that carbon leakage may not only affect jobs and emissions in the short run, it also affects long-run competitiveness