Understanding the Drivers of Environmental Innovation: Regulatory Pressures, Economic Incentives and Market Mechanisms

ABSTRACT This study examines the associations between regulatory pressures, economic incentives, market‐related mechanisms and firms' reported environmental benefits from innovation, distinguishing between benefits related to internal production processes and those that benefit end users. Using Community Innovation Survey 2022 (CIS 2022) microdata for Portugal, the analysis covers 3880 firms with complete information on environmental innovation activities. Probit models estimate the probability of reporting significant environmental benefits, with ordered probit models used as robustness checks. Results show positive and significant associations for all three driver groups, although their strength varies across innovation outcomes. Economic incentives and market‐related factors display the most consistent relationships, while regulatory pressures are weaker. Environmental demand, voluntary initiatives and rising material costs show the most consistent positive associations with environmental benefits, whereas environmental taxes and public procurement requirements are associated with lower probabilities in some models. These findings highlight the importance of policy mixes that combine regulatory clarity, economic incentives and market demand to support environmentally oriented innovation.