The impact of management systems on technical change: the adoption of pollution prevention techniques

A firm’s capability to innovate is influenced by its organizational structure. We examine the effect of Total Quality Environmental Management (TQEM) on the adoption of innovative pollution prevention activities over the period 1992–1996, and show that the rate of innovation increases following the adoption of TQEM. However, the effect of TQEM on pollution prevention innovation “wears out” over time. Our analysis indicates that this is likely because pollution prevention undertaken in one year continues to be effective in future years. This, in turn, reduces the incentives for further innovation due to declining marginal returns, rather than because the institutional effectiveness of TQEM weakens. We provide corroborative evidence based on the time profile of pollution prevention of firms that adopted TQEM prior to the start of our sample, and also develop a stylized model with (partial) obsolescence of pollution prevention innovations that matches the empirical regularities we obtain. Our findings shed light on the importance of organizational structure on the pace of technical change.