Environmental Externalities and Weak Appropriability: Influences on Firm Pollution Reduction Technology Development

Technological development plays a critical role in society’s ability to address environmental issues. Building on Teece’s profiting from innovation framework, we articulate how a double-externality problem weakens the appropriability regime surrounding pollution reduction technology (PRT). We then develop a theoretical framework articulating how weak appropriability induces firms to modify their innovation strategies for PRT development by increasing the extent to which they engage in organizational exploration (rather than exploitation) and emphasizing incremental (rather than radical) technologies. Noting that the effects of weak appropriability are unlikely to be static, we detail how the accumulation of organizational capabilities for reducing pollution diminishes the extent to which firms modify their innovation strategies for PRT. That is, firms become less exploratory and less focused on incremental technology as they gain experience with pollution reduction. Results of broad-sample empirical analyses of 206,277 patents held by 203 U.S. manufacturing firms over a 20-year period provide support for our framework.