This paper examines the relationship between environmental regulation and innovation using panel data. The authors analyze how changes in regulatory stringency, measured by regulatory compliance costs, are associated with innovative activity in regulated industries. They consider two measures of innovative activity: total private expenditures on research and development (R&D) and the number of successful patent applications by domestic firms. The study finds that lagged environmental compliance expenditures have a significant positive association with R&D expenditures when controlling for unobserved industry-specific effects. This suggests that increases in compliance expenditures within an industry are associated with increases in R&D shortly thereafter. However, there is little evidence that industries' inventive output, as measured by successful patent applications, is related to compliance costs. The authors also find that the relationship between regulatory stringency and innovative activity depends on the measure of innovation used. While R&D expenditures show a positive association with regulatory compliance costs, patenting activity does not. This indicates that environmental regulation may stimulate R&D but not necessarily patenting. The study uses panel data at the two and three-digit SIC code industry level and a fixed effects model to determine whether changes in regulatory stringency are associated with more or less innovative activity by regulated industries. The results suggest that environmental regulation may have a positive impact on R&D but not on patenting. The findings are consistent with the "weak" version of the Porter hypothesis, which suggests that environmental regulation can stimulate certain types of innovation. The authors conclude that further research is needed to better understand the relationship between environmental regulation and innovation. They suggest that focused industry studies could provide more insights into how regulated firms respond to new regulations and the potential benefits of such regulations. The study also highlights the limitations of using compliance expenditures as a measure of regulatory stringency and the challenges of classifying patents by industry of origin.This paper examines the relationship between environmental regulation and innovation using panel data. The authors analyze how changes in regulatory stringency, measured by regulatory compliance costs, are associated with innovative activity in regulated industries. They consider two measures of innovative activity: total private expenditures on research and development (R&D) and the number of successful patent applications by domestic firms. The study finds that lagged environmental compliance expenditures have a significant positive association with R&D expenditures when controlling for unobserved industry-specific effects. This suggests that increases in compliance expenditures within an industry are associated with increases in R&D shortly thereafter. However, there is little evidence that industries' inventive output, as measured by successful patent applications, is related to compliance costs. The authors also find that the relationship between regulatory stringency and innovative activity depends on the measure of innovation used. While R&D expenditures show a positive association with regulatory compliance costs, patenting activity does not. This indicates that environmental regulation may stimulate R&D but not necessarily patenting. The study uses panel data at the two and three-digit SIC code industry level and a fixed effects model to determine whether changes in regulatory stringency are associated with more or less innovative activity by regulated industries. The results suggest that environmental regulation may have a positive impact on R&D but not on patenting. The findings are consistent with the "weak" version of the Porter hypothesis, which suggests that environmental regulation can stimulate certain types of innovation. The authors conclude that further research is needed to better understand the relationship between environmental regulation and innovation. They suggest that focused industry studies could provide more insights into how regulated firms respond to new regulations and the potential benefits of such regulations. The study also highlights the limitations of using compliance expenditures as a measure of regulatory stringency and the challenges of classifying patents by industry of origin.