| Summary: | This paper provides new evidence on the relationship between environmental expenditure, innovation, and revenue in Malaysian manufacturing industry. This study employed a panel data analysis involving 22 manufacturing sectors from 2008 to 2012. Apart from the panel data regression analysis, the Granger causality test was also performed to examine a causal relationship based on the Porter hypothesis. The results showed that both environmental expenditure and innovation undoubtedly influenced the revenue of firms across manufacturing sectors. The results also revealed the existence of a bilateral relationship between innovation and environmental expenditure. Furthermore, this result was in line with the Porter hypothesis, which asserts that stringent policy will induce innovation activities. However, a more comprehensive and structured environmental policy, particularly involving taxation and financing mechanisms, is also crucial to encourage a strong commitment from the industries. In general, it can be concluded that for a firm in the manufacturing sector, a high commitment to environmental protection expenditure and innovation will directly influence its performance. © 2019 Kasetsart University.
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