With the public opinion getting more aware of adverse environmental consequences of economic activities, many firms have improved environmental performance not only due to more stringent environmental regulation but also on a voluntary basis. However, empirical evidence on the economic effects of such improved environmental performance is rather scant to date. Against this background, this paper addresses economic impacts of firms’ efforts towards cleaner production A production function approach where environmental investment as well as environmental and energy expenditures are explicitly considered as inputs provides the conceptual framework for our investigation. In our empirical analysis for the German manufacturing industry, we employ both static and dynamic panel techniques taking into account possible complex causal relations of variables related to environmental performance and economic performance. Our results do not provide evidence for positive impacts of both environmental and energy expenditures on production growth. In contrast, environmental investment positively impinges upon productivity, indicating that environmental performance, as measured by environmental investment, may be a productivity driver. From a policy perspective, this finding suggests that, in order to be compatible with economic goals such as productivity, environmental regulation should stimulate investment.


environmental performance, environmental regulation, productivity