This thesis is devoted to the empirical analysis of how externalities—the nonexistence of private markets in some good or the absence of sufficient incentives to establish such markets— affect firm performance and growth. A minor part investigates a direct link between positive externalities, in the form of localized knowledge spillovers, and firm growth, by testing the so-called local export spillover hypothesis: Exporting firms in a region may reduce export entry costs for other local firms through export-related informal knowledge and information flows. The results support the notion of the role of such local externalities as external input into firms’ export-specific knowledge function, while also providing some support for such export spillovers being more important in contract-intensive industries and small firms.

The bulk of my articles examines indirect performance effects of negative pollution externalities. This type of externality calls for formal, as well as informal, institutions that take corrective measures to make polluting agents pay the social and environmental cost of their emissions, thereby restoring the social efficiency losses caused by those externalities. The operational tool to achieve an internalization of the social and environmental costs brought about by pollution externalities is environmental policy, with laws and regulations constituting common policy manifestations. In other words, protecting human health and the environment is the primary purpose of environmental policies. Increasingly, the economic growth paradigm of modern market economies has added a second argument to polluting societies’ welfare function: economic growth.

Harmonizing these two arguments—social and environmental well-being and economic welfare—has traditionally been considered difficult, with conventional wisdom arguing that environmental regulation of polluting agents is costly and ultimately detrimental to growth. Harvard professor Michael Porter, in his widely debated Porter Hypothesis, has challenged this entrenched view, arguing that environmental policy, if ‘well-designed,’ can attain a ‘double dividend’ or ‘win-win’situation of simultaneous environmental and economic benefits. The present thesis aims to find empirical evidence of Porter’s reasoning. Using microdata on the Swedish pulp, paper and chemical industries, it attempts to empirically analyze whether there are adequate institutional configurations in the form of properly crafted environmental policies that allow for an internalization of pollution externalities such that a ‘win-win’ situation characterized by the simultaneous accomplishment of environmental benefits for society and economic benefits for the polluting agents can be created. The empirical results suggest that environmental regulation, if properly designed, indeed can induce mutual environmental and economic benefits, which provides valuable implications for modern environmental policy.