While consumption and degradation of natural resources and the environment continue to grow worldwide, worries about declining competitiveness of European industry vis-à-vis US and Asian competitors persist. Against this background, the question of what drives environmental innovation in industry and what role regulation plays in this regard has become ever more relevant. Ten years ago Porter and van der Linde popularized the win-win proposition, stating that environmental regulation could

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... e innovation by making industry aware of and willing to exploit otherwise missed opportunities. This, they claimed, would result in environmental benefits and increased competitiveness. The Porter hypothesis has spurred a substantial amount of research on the influence of environmental regulation on innovation, but the results have so far remained inconclusive. We discuss the key problems in extant research and outline a comprehensive analytical framework for studying the effects of environmental regulation on innovation alongside firm-internal conditions and external market forces. This framework also takes into account varying opportunities for direct customer benefits across areas of environmental innovation. Very few political scientists have, thus far, ventured into this research area. Those who have have focused on the sectoral, national or systemic (international) level. To complement this research we propose to improve the micro-foundations of our understanding of environmental innovation by applying the framework outlined in this paper at the firm and innovation field level within and across firms, industries, and countries.