Product-Related Environmental Regulation, Innovation, and Competitiveness: Empirical Evidence From Malaysian and Vietnamese Firms

Abstract

In the past decade, product-related environmental regulations (PRERs) aimed at environmental protection and consumers’ health and safety were actively introduced in developed countries, led by the EU. This study examined the impact of two PRERs released by the EU—RoHS and REACH—on Malaysian and Vietnamese firms’ compliance. The first analysis focuses on the R&D enhancement effect of PRERs. We then consider productivity as a realization of innovations and examine if the R&D enhanced by PRERs can promote further productivity. The result shows that the response to REACH can create incentives to advance R&D. Further estimations on the effect of induced R&D on firm productivity show a significant positive relationship between them. On the other hand, no relationship between the response to RoHS and R&D expenditure is found. Moreover, the analysis also shows that firms comply with RoHS and REACH in different ways, but just the ability to continue exporting to the EU motivates compliance.

KEYWORDS:

• RoHS
• REACH
• innovation
• productivity
• Porter Hypothesis

JEL Classifications:

• F18
• O31
• Q55
• Q56

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The hazardous substances include mercury, lead, cadmium, hexavalent chromium, polybrominated biphenyl, and polybrominated diphenyl ether.

2 The additional substances include bis (2-ethylhexyl) phthalate, butyl benzyl phthalate, dibutyl phthalate, and diisobutyl phthalate.

3 For details, see Porter and van der Linde (1995, pp. 99-100).

4 As mentioned in Section 1, this paper employs firm’s R&D expenditure as the measurement of the innovation activities. Operationally, innovation activity is generally assessed through R&D expenditure (the input of innovation) or through the number of registered patents (the product of innovation) in the literature. Refer to Ambec et al. (2013) for a comprehensive summary of the measurements employed in previous studies. This paper does not consider the number of patents due to data limitation.

5 R&D expenditures of Vietnamese firms are denominated in Malaysian Ringgit. The exchange rate is fixed at 1VND=0.00015MYR.

6 The choices “cannot meet” and “do not try to meet” both mean that the firm has no compliance with the PRER. More specifically, the choice “do not try to meet” is about the reason why the firm has no compliance with the PRER. During the analysis, we regard firms that chose “do not try to meet” as “no compliance with PRER” and thus, there is no difference between “cannot meet” and “do not try to meet” when our key variable PRER is responsible to distinguish “with compliance” and “without compliance” to PRER regulations.

7 Since it seems reasonable to assume that a firm’s capital is proportional to its assets, we use assets as a proxy for capital in this study.

8 In the dataset, most of the firms (1318/1425) answered a single sector that they belong. The specific classification of manufacturing sectors and PRER-targeted sectors is listed in Table 3.

9 The survey was implemented for firms in Malaysia (November 2012 to February 2013, Penang State) and Vietnam (November 2011 to January 2012, nationwide) by distributing survey tables that classified the data into four categories: 1) basic information, 2) input procurement and certificates, 3) chemical management, and 4) export status.

10 EXPR is not significant in the REACH case, however.

11 We did not include RoHS and REACH dummies into Eq. (1) simultaneously due to the high correlation between the two variables (Cor(RoHS,REACH)=0.582), which may raise the multi-collinearity problem.

12 We do not include this interaction term in our regressions because the sample size becomes even smaller, which critically reduces the reliability of the analysis.

13 Specifically, the survey questionnaire asks the firms how much the price of the product changed because of meeting the PRERs by letting the firms choose one of the following three choices: ‘increased’, ‘unchanged’, or ‘decreased’. In this case, we can assume that for most surveyed firms, any price changes of the product had occurred right after the process of compliance, which was years before the data collection, as we discussed in Section 4.4.

14 An alternative hypothesis on firm’s reaction after the compliance to PRERs is that an induced R&D might lower the production costs or increase efficiency, giving firms a price advantage over their competitors. While we cannot definitely deny the possibility that the firms choose to enjoy the price advantage, the small proportion of firms decreasing their price indicates that it is more possible that firms preferred to upgrade their product.

15 As mentioned in the introduction and background, although it is possible for the Porter Hypothesis to hold in ELV and WEEE, we are forced to give up the examination due to limited observations of the two PRERs.

Additional information

Funding

This work was supported by Japan Society for the Promotion of Science: [Grant Number 17J00444].

Notes on contributors

Qizhong Yang

Qizhong Yang, Assistant Professor at College of Economics, Aoyama Gakuin University; Education: Ph.D. in Graduate School of Economics, Osaka University.

Tsunehiro Otsuki

Tsunehiro Otsuki, Professor at Osaka School of International Public Policy, Osaka University; Education: Ph.D. Department of Agricultural and Resource Economics, University of Maryland.

Etsuyo Michida

Etsuyo Michida, Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO; Education: Ph.D. in Economics, Kobe University.