The Impact of Environmental Regulation on Productivity and Exports: A Firm-Level Evidence from China

Abstract

This paper investigates the influence of environmental regulation on firm performance, as captured by firm productivity and firm exports. We first construct a Melitz-style model investigating the causal effects of environmental regulation on firm productivity and firm exports, and then test the theoretical predictions using firm-level data over the period 2005–2009. The theoretical and empirical investigation suggests that environmental regulation promotes firm productivity slightly with a lagged effect, has a harmful impact on firm exports, and has a U-shaped relationship with firm exports. China is to the far left of the inflection point, but this U-shaped relationship is not present at firms in clean industries and clean regions.

KEY WORDS:

• China
• environmental regulation
• exports
• firm productivity

JEL CLASSIFICATION:

• F14
• G32

Notes

1. Rubashkina (2015) presents a good survey of the relationship between environment regulation and economic performance.

2. The data come from China’s National Bureau of Statistics, with growth rates computed by the authors.

3. We adopt the same functional form for abatement as Copeland and Taylor (2003).

4. The pollution removal rate = pollution removal volume/(pollution removal volume + pollution emission volume). The higher the pollution removal rate is, the stricter the environmental regulation is.

5. Some papers adopt other lower depreciation rates, such as 10% or 5%. The choice of different depreciation rates does not affect our qualitative results.

6. All price indices are from the China Statistical Yearbook.

7. We compute the inflection point by $e^{\left(-{\beta }_1/2{\beta }_2\right)}$.

8. The average strictness of environmental regulation is 2.43 over the period 2002–2009.

9. The clean region is in the TCZ, and the dirty regions is in the non-TCZ.

10. In the regression on exports, factor productivity is suspected of being endogenous because of learning by exporting. Helpman, Melitz, and Rubinstein (2008) find that this learning by exporting effect widely exists in developing countries. We address it using its lagged variables with GMM-style IV options.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71663003].