A rising tide lifts all boats? Effects of institutional characteristics on environmental innovation in Latin America

Purpose By implementing environmental innovations, firms can reduce or eliminate the harmful impact of their production process on the natural environment. Engaging in environmental innovation can be considered a win–win strategy that helps firms improve their legitimacy and avoid penalties for poor compliance with regulations. Drawing on institutional theory, this paper aims to examine the effect of country-level institutional characteristics – government effectiveness, innovation capacity and market pressures – on the environmental innovation of companies. Design/methodology/approach Data from 396 companies located in nine Latin American countries, from 2018 to 2021, were analyzed. To test the research hypotheses, the panel data analysis method was chosen. Findings Findings indicate that government effectiveness and market pressure are positively related to environmental innovation. Therefore, our study demonstrates that the institutional environment plays an important role in stimulating companies to develop ecological products and green technologies. This effect is found both in turbulent (pandemic) and stable times, which suggests that companies need a favorable institutional environment to develop new environmental innovation strategies. Originality/value In this paper, we looked specifically at three institutional characteristics: government effectiveness, innovation capacity and market pressure. Thus, this is the first to analyze the influence of institutional factors on the environmental innovation of companies in this geographic region.