This thesis looks at the potential for environmental regulation to induce economically beneficial technical change in industrial activity. This question is explored in the context of the recent introduction of Irish legislation aimed at promoting such technical change. The research focuses on the experience of one industrial sector, the pharmaceutical manufacturing sector, in making the adjustment to the new Integrated Pollution Control regulations. The key question of interest is the importance of organisational capabilities in determining firms’ ability to adjust to a changed regulatory environment, to develop new organisational processes and to implement technical change. The thesis presents an analysis of competing theoretical approaches to analysis of regulation and technical change. The evolutionary theory of the firm, with its emphasis on organisational capabilities as the driver of technical change in firms, is identified as the most appropriate framework for the development of a coherent model of the relationship between environmental regulation and firm technical change. The empirical research was undertaken using two, complementary approaches. Measures of capability were constructed for all pharmaceutical firms licensed in the first phase of IPC implementation. This allows for comparative analysis of the role of organisational capabilities in the sector’s response to new environmental regulations. Further analysis of questions around the origins, significance and contingent nature of capabilities is explored in qualitative, case study research in five selected case companies. The research presented in this dissertation show that firms are differentially able to respond to technology-forcing regulations and that these differences are associated with differences in organisational capabilities. Firms with high performing dynamic capability were able to ensure effective environmental performance, preserving flexibility of action and supporting overall competitiveness.