by Ivan Miroshnychenko, Knut Haanaes, Julia Binder Published February 26, 2026 in Sustainability • 8 min read
For two decades, governments around the world have intensified their push toward a greener economy. Carbon pricing mechanisms have expanded, emissions standards have tightened, and sustainability disclosure requirements have proliferated rapidly. At the same time, companies face relentless pressure from capital markets, customers, and employees to innovate more aggressively in support of the net-zero transition.
Given this momentum, a critical question becomes: do environmental policies actually stimulate the green innovation that the world depends on for a successful energy transition, and if so, does the answer differ based on where a company operates?
We examined this question using a uniquely comprehensive dataset of 1,831 publicly traded firms across 34 countries from 2002 to 2020. By analyzing how firms respond to national environmental policies, both market-based mechanisms like carbon taxes and emissions trading, and nonmarket regulations such as emissions limits and technology standards, we sought to understand not only whether policy works, but why and under what conditions.
What we found is not a simple linear story. Instead, the impact of environmental policy on corporate green innovation depends profoundly on the institutional context in which firms operate. Policies do not act in a vacuum. They interact with a country’s formal systems, informal norms, and competitive pressures in ways that either amplify or dampen innovation.
Understanding this dynamic is crucial, not only for governments designing the next wave of sustainability measures, but also for companies developing strategies in an environment where expectations around climate performance continue to rise.
Across industries – energy, transportation, manufacturing, technology – executives routinely voice a belief that clearer, stronger environmental policies will unlock green innovation. And in many cases, this belief is justified. Policy can de-risk investment, provide long-term direction, and catalyze the development of new markets.
But our cross-country analysis shows that the relationship is not universally positive. In fact, the impact varies dramatically depending on whether firms operate in developed or emerging economies.
This divergence helps explain the long-standing contradictions in academic research. Some studies find that policy boosts innovation; others find the opposite. Our work reveals that these inconsistent findings stem from an important oversight: economies differ systematically in their institutional foundations, and policies interact with these foundations in fundamentally different ways.
“Developed economies typically possess strong, stable formal institutions.”
Every firm operates within a web of institutions that shape incentives and constrain choices. Some are formal institutions, such as legal systems, regulatory bodies, capital markets, or intellectual property protections. Others are informal, including norms, cultural expectations, reputation systems, or trust networks.
Developed economies typically possess strong, stable formal institutions. Innovation is supported by reliable intellectual property systems, deep financial markets, predictable regulations, and competitive industries. Firms already face well-established pressures to innovate, whether or not new environmental policies are introduced.
Emerging economies, by contrast, often grapple with institutional voids. Legal systems can be less predictable, contract enforcement less reliable, and intellectual property protections weaker. In these environments, firms face elevated risk when investing in long-term green technologies. Yet these economies also possess powerful informal networks (community expectations, relational ties, political and social relationships) that help firms navigate uncertainty.
These institutional differences create deeply different innovation landscapes. And when national environmental policies enter these landscapes, they interact with them in ways that determine whether innovation accelerates or stalls.
These forces together constitute a powerful underlying driver for green innovation.
In developed markets, our data shows that additional or more stringent environmental policies, whether market-based or nonmarket, do not significantly increase corporate green innovation. In some cases, nonmarket regulations even exhibit a slightly negative effect.
This finding often surprises policymakers, but the explanation is intuitive. Firms in advanced economies already face strong competitive pressure, demanding stakeholders, sophisticated capital markets, mature innovation ecosystems, and extensive voluntary sustainability commitments.
These forces together constitute a powerful underlying driver for green innovation. Adding more regulation on top does not fundamentally change incentives, but it can change behavior.
When new rules are introduced in mature institutional settings, firms often shift into compliance mode. Managerial attention moves toward meeting reporting requirements, mitigating legal and reputational risk, and adjusting internal controls. These are necessary activities, but they can crowd out exploratory innovation.
Consider the recent expansion of sustainability disclosure requirements in Europe. While these measures improve transparency, they also require substantial internal resources, potentially drawing attention away from the development of new technologies and green business models.
In short, when the underlying system already pushes firms toward innovation, marginal regulation produces marginal gains and sometimes unintended consequences.
In effect, environmental policy in emerging markets becomes a catalyst that compensates for weaker formal institutions and strengthens informal ones.
The story in emerging markets could not be more different. Here, environmental policies, both market-based and nonmarket, have a strong, statistically significant positive impact on corporate green innovation.
Because formal institutions are less stable, policy acts as a substitute for missing institutional support. It provides clarity, predictability, and legitimacy. All this reduces the risk that discourages long-term investment.
In effect, environmental policy in emerging markets becomes a catalyst that compensates for weaker formal institutions and strengthens informal ones. This dual function explains why its impact is so much stronger than in advanced economies.
Our findings also highlight the importance of informal institutions, a factor often overlooked in policy design. When formal systems of protection (like IP enforcement) are weaker, informal networks become essential mechanisms for governing innovation. They help firms protect know-how, reduce opportunism, coordinate across supply chains, build legitimacy with government and society, and accelerate adoption of new technologies.
In these environments, national environmental policies work best when they align with or strengthen these informal structures. This is why nonmarket policies in emerging economies have particularly strong effects. They reinforce existing norms rather than trying to replace them.
For both policymakers and executives, this underscores a critical insight. Innovation ecosystems are social systems, not just economic or regulatory ones.
After nearly two decades of data across dozens of countries, our research yields three clear lessons for policymakers, boards, and executives:
Our study shows that environmental policy effectiveness depends fundamentally on institutional context. In emerging markets, policies act as catalysts that substitute for weak institutions and mirror informal norms, significantly boosting green innovation. In advanced economies, firms already face strong innovation pressures, and additional regulation offers only marginal gains, sometimes shifting attention toward compliance rather than exploration.
As the world confronts the global challenge of decarbonization, understanding the interplay between policy and institutions is essential. Environmental regulation can unlock green innovation, but only when it aligns with the institutional context in which firms operate. Leaders who understand this dynamic will be best positioned to design, influence, and respond to the policy frameworks that shape tomorrow’s sustainable economy.
Research Fellow and Term Research Professor at IMD Business School
Ivan Miroshnychenko is Research Fellow and Term Research Professor at IMD Business School, and Affiliate Research Fellow at Sant’Αnna School of Advanced Studies (Italy). He carries out research on economics and management of family business and sustainability that has been published in top academic journals.
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Professor of Strategy
Knut Haanaes is Professor of Strategy at IMD. He is the former Dean of the Global Leadership Institute at the World Economic Forum. He was previously a Senior Partner at the Boston Consulting Group and founded their first sustainability practice. At IMD he teaches in many of the key programs, including the MBA, and is Co-Director of the Leading Sustainable Business Transformation program (LSBT) and the Driving Sustainability from the Boardroom (DSB) program. His research interests are related to strategy, digital transformation, and sustainability.
Professor of Business Transformation and Director of the Center for Sustainable and Inclusive Business
Julia Katharina Binder, Professor of Business Transformation, is a renowned thought leader recognized on the 2022 Thinkers50 Radar list for her work at the intersection of sustainability and innovation. As Director of IMD’s Center for Sustainable and Inclusive Business, Binder is dedicated to leveraging IMD’s diverse expertise on sustainability topics to guide business leaders in discovering innovative solutions to contemporary challenges. At IMD, Binder serves as Program Director for Creating Value in the Circular Economy and teaches in key open programs including  Transition to Business Leadership (TBL), and Leading Sustainable Business Transformation (LSBT). She is involved in the school’s EMBA and MBA programs, and contributes to IMD’s custom programs, crafting transformative learning journeys for clients globally.
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