Will businesses’ efforts to clean up their own waste divert resources away from innovation?

If there’s one thing that troubles today’s technology executives, it’s the challenge of reconciling innovation with government regulation. One regulation that alarms CEOs is Extended Producer Responsibility (EPR). EPR puts the responsibility of handling post-consumer goods, such as unusable products and packaging, on companies rather than consumers.  

Historically, consumers have been responsible for properly disposing of their waste. As a result, landfills around the world are overflowing. By contrast, EPR shifts waste disposal back to the producers, pushing them to build a more circular supply chain and reduce waste in the production process. Shifting responsibility stimulates the design of more sustainable goods, which can be more cost effective. Municipalities also benefit from EPR policies, because it reduces the cost burden of processing discarded post-consumer goods.  

Understandably, producers fear that higher operational costs under EPR will restrict innovation. Innovation -  designing new products or improving existing systems -  requires adequate financial and human resources. In theory, if producers spend their limited capital on disposing of post-consumer goods, they will have less money and human capital available to design new products. 

However, researchers from Nanjing University of Information Science and Technology and Shandong University of Technology demonstrate that EPR regulations can actually increase green innovation. The study, recently published in the Journal of Clean Production, analyzes Chinese manufacturing data for four types of post-consumer products: electrical appliances, automobiles, lead-acid batteries, and packaging.  

Authors Zhao et al. acknowledge that they cannot perfectly capture all the elements that drive innovation. So they use a common statistical approach known as difference-in-differences methodology. It captures the differences in outcomes that occur between the group impacted by EPR policy and those who are not. The impact of the EPR policy on a company’s “innovation” is measured by the number of its green patents - inventions that contribute to the preservation of the environment, as certified by a State Intellectual Property Office. 

The findings reveal that for firms subject to EPR, government subsidies are a stronger driver of innovation, compared to a company’s environmental responsibility. The authors argue that while EPR could raise the operational costs of companies in the short term, businesses may discover that reducing pollution is more beneficial in the long term. Zhao et al. suggest that organizations subject to EPR policies, such as state-owned companies, should use their understanding of consumer needs to innovate through market-oriented means. 

Importantly, these findings weaken the key argument that hinders wide implementation of EPR. Building on this research, national government can now broaden the reach of EPR experiments beyond pilot programs to implement EPR policies in more regions in the country. Simultaneously, policy makers can support EPR implementation with additional rules and local regulations.  

As businesses strive to succeed in this world of limited resources, they need to continuously reassess their views on regulations. By demonstrating that ERP policies are not a barrier to innovation, Zhao et al.’s study helps companies take a step in this direction. Moreover, this study serves as a stepping stone for companies to reconsider their perceptions of other impactful regulations beyond EPR.