Effects of environmental regulations on the total factor productivity in Korea from 2006–2014

ABSTRACT

This study investigates the effects of environmental stringency on the productivity in Korea. Previous studies have focused on the effects of environmental regulations on productivity at either the firm or industry level. In this study, the effects that the environmental protection expenditure have on the total factor productivity (TFP) are analysed using a firm- and industry-level panel dataset for 2006–2014. A dynamic panel data model was used for the industry-level analysis of the panel data from 2006–2014, and a multilevel linear model was used for the firm-level analysis of the data from 2010–2014. The results indicate that the environmental protection expenditure has a negative correlation with the TFP, including a lag variable of environmental research and development. The multilevel linear model analysis shows similar results for the environmental protection expenditure and environmental research and development. These findings suggest that the Porter hypothesis, which suggests that well-designed environmental policies may enhance productivity, is not applicable for Korea.

KEYWORDS:

• Environmental regulation
• abatement cost
• total factor productivity
• South Korea
• dynamic panel data model
• multilevel regression

Disclosure statement

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

Notes

1 Source: Regulatory Reform Committee

2 Source: Regulatory Reform Committee.

3 The EPE is announced only at the nation level, not the industry level. Therefore, previous studies were unable to examine the Korean industry level approach using the industrial EPE.

4 The slowdown in 2009 is likely the aftermath of the U.S.A. financial crisis. At that time, the output of manufacturing, economic growth rate, and exports to the U.S.A. decreased compared with that in 2008 (KW1,331,996 billion in 2008 → KW1,313,909 billion in 2009; 2.8 in 2008 → 0.7 in 2009; $46.4 billion in 2008 → $37.6 billion in 2009).

5 For reference, Korea ranked in the first position among the OECD countries in 2014 in terms of R&D expenditures as a percentage of GDP: Korea (4.29%), Israel (4.27%), Japan (3.4%), and U.S.A. (2.16%).

6 This represents business activity (collecting, delivering, and reducing the levels of pollutants) that a firm consigns to an external public or private agency.

7 General R&D is calculated by subtracting the environmental R&D from the total R&D.

8 For $\mathrm{\Delta }{y}_{t-1}$, $y_{i,t-2}$, were used as instrument variables.

9 This study used firm-level data from 2010–2014 during which Korea experienced an economic recession.

10 The EPE data could nest the firm-level dataset, i.e., the expenditure represents higher-level data into which firm-level data can be classified. In this case, we assumed that firms within the same industry have similar properties (resembling the TFP trend of firms in a categorised group with an EPE).

11 0.706 × log(1.1) = 0.025, 0.819 × log(1.1) = 0.033, 0.844 × log(1.1) = 0.035

12 –0.001 × log(1.1) = –0.00004

13 The EPE contribution to the output in the Korean manufacturing industry was only 0.37% in 2010.

14 –0.011 × log(1.1) = 0.00046

15 –0.169 × log(1.1) = –0.007

Additional information

Notes on contributors

Jin-Won Lee

Jin-Won Lee is Director of Office for Government Policy Coordination Prime Minister's Secretariat, Korea. He obtained his PhD degree from Lancaster University Management School, U.K. His research interest include environment regulation, trade and national territory policy.

Young-Hwan Lee

Young-Hwan Lee obtained his PhD degree from Graduate School of Public Administration, Seoul National University, South Korea. His research interests cover (a) finance and research performance and (b) organization behavior, (c) higher education. He has published in peerreview journal, such as Sustainability, Journal of Technology Transfer, etc.