IDEAS home Printed from https://ideas.repec.org/a/eee/ecolec/v183y2021ics0921800921000276.html
   My bibliography  Save this article

Corruption pays off: How environmental regulations promote corporate innovation in a developing country

Author

Listed:
  • Fu, Tong
  • Jian, Ze

Abstract

The Porter hypothesis asserts that well-designed regulations can foster innovation for a “win-win” solution, but it requires environmental regulations to be strict but flexible, which is impractical for most developing countries. This paper explores how environmental regulations in a developing country can spur corporate innovation. Using the geographic distribution of wars during 1644 and 1911 as an instrument, we document that the stringency of environmental regulations in China promotes corporate innovation only when interacted with a region with high corruption. We further identify that the causal effect of the stringency on corporate innovation is mediated by bribery expenditures statistically and economically, and all the corresponding direct effects are insignificant. Ultimately, this paper confirms that corruption is the key mechanism in the Porter effect in a developing country.

Suggested Citation

  • Fu, Tong & Jian, Ze, 2021. "Corruption pays off: How environmental regulations promote corporate innovation in a developing country," Ecological Economics, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:ecolec:v:183:y:2021:i:c:s0921800921000276
    DOI: 10.1016/j.ecolecon.2021.106969
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0921800921000276
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ecolecon.2021.106969?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michael Greenstone & Rema Hanna, 2014. "Environmental Regulations, Air and Water Pollution, and Infant Mortality in India," American Economic Review, American Economic Association, vol. 104(10), pages 3038-3072, October.
    2. Candau, Fabien & Dienesch, Elisa, 2017. "Pollution Haven and Corruption Paradise," Journal of Environmental Economics and Management, Elsevier, vol. 85(C), pages 171-192.
    3. Mark A. Cohen & Adeline Tubb, 2018. "The Impact of Environmental Regulation on Firm and Country Competitiveness: A Meta-analysis of the Porter Hypothesis," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 5(2), pages 371-399.
    4. Brent Hueth & Tigran Melkonyan, 2009. "Standards and the regulation of environmental risk," Journal of Regulatory Economics, Springer, vol. 36(3), pages 219-246, December.
    5. Lixin Colin Xu, 2011. "The Effects of Business Environments on Development: Surveying New Firm-level Evidence," The World Bank Research Observer, World Bank, vol. 26(2), pages 310-340, August.
    6. Stefan Ambec & Mark A. Cohen & Stewart Elgie & Paul Lanoie, 2013. "The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 7(1), pages 2-22, January.
    7. Au, Chun-Chung & Henderson, J. Vernon, 2006. "How migration restrictions limit agglomeration and productivity in China," Journal of Development Economics, Elsevier, vol. 80(2), pages 350-388, August.
    8. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    9. Besley, Timothy & Ghatak, Maitreesh, 2007. "Retailing public goods: The economics of corporate social responsibility," Journal of Public Economics, Elsevier, vol. 91(9), pages 1645-1663, September.
    10. Alberto Alesina & Paola Giuliano & Nathan Nunn, 2013. "On the Origins of Gender Roles: Women and the Plough," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 469-530.
    11. Cull, Robert & Xu, Lixin Colin & Yang, Xi & Zhou, Li-An & Zhu, Tian, 2017. "Market facilitation by local government and firm efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 460-480.
    12. Zhangkai Huang & Lixing Li & Guangrong Ma & Lixin Colin Xu, 2017. "Hayek, Local Information, and Commanding Heights: Decentralizing State-Owned Enterprises in China," American Economic Review, American Economic Association, vol. 107(8), pages 2455-2478, August.
    13. Nancy Qian, 2008. "Missing Women and the Price of Tea in China: The Effect of Sex-Specific Earnings on Sex Imbalance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1251-1285.
    14. Maria Francesch-Huidobro & Carlos Wing-Hung Lo & Shui-Yan Tang, 2012. "The Local Environmental Regulatory Regime in China: Changes in Pro-Environment Orientation, Institutional Capacity, and External Political Support in Guangzhou," Environment and Planning A, , vol. 44(10), pages 2493-2511, October.
    15. Biswas, Amit K. & Thum, Marcel, 2017. "Corruption, environmental regulation and market entry," Environment and Development Economics, Cambridge University Press, vol. 22(1), pages 66-83, February.
    16. Robert Tollison, 2012. "The economic theory of rent seeking," Public Choice, Springer, vol. 152(1), pages 73-82, July.
    17. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    18. Raymond Hicks & Dustin Tingley, 2011. "Causal mediation analysis," Stata Journal, StataCorp LP, vol. 11(4), pages 605-619, December.
    19. Claire Brunel & Arik Levinson, 2013. "Measuring Environmental Regulatory Stringency," Working Papers gueconwpa~13-13-02, Georgetown University, Department of Economics.
    20. Xie, Rong-hui & Yuan, Yi-jun & Huang, Jing-jing, 2017. "Different Types of Environmental Regulations and Heterogeneous Influence on “Green” Productivity: Evidence from China," Ecological Economics, Elsevier, vol. 132(C), pages 104-112.
    21. Ioanna Boulouta, 2013. "Hidden Connections: The Link Between Board Gender Diversity and Corporate Social Performance," Journal of Business Ethics, Springer, vol. 113(2), pages 185-197, March.
    22. Kraus, Sascha & Rehman, Shafique Ur & García, F. Javier Sendra, 2020. "Corporate social responsibility and environmental performance: The mediating role of environmental strategy and green innovation," Technological Forecasting and Social Change, Elsevier, vol. 160(C).
    23. Zhang, Daisheng & Aunan, Kristin & Martin Seip, Hans & Vennemo, Haakon, 2011. "The energy intensity target in China's 11th Five-Year Plan period--Local implementation and achievements in Shanxi Province," Energy Policy, Elsevier, vol. 39(7), pages 4115-4124, July.
    24. Hongbin Cai & Hanming Fang & Lixin Colin Xu, 2011. "Eat, Drink, Firms, Government: An Investigation of Corruption from the Entertainment and Travel Costs of Chinese Firms," Journal of Law and Economics, University of Chicago Press, vol. 54(1), pages 55-78.
    25. Kostka, Genia, 2014. "Barriers to the implementation of environmental policies at the local level in China," Policy Research Working Paper Series 7016, The World Bank.
    26. Adam B. Jaffe & Karen Palmer, 1997. "Environmental Regulation And Innovation: A Panel Data Study," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 610-619, November.
    27. João F. Gomes & Leonid Kogan & Motohiro Yogo, 2009. "Durability of Output and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 941-986.
    28. Patricia Cortés & Jessica Pan, 2019. "When Time Binds: Substitutes for Household Production, Returns to Working Long Hours, and the Skilled Gender Wage Gap," Journal of Labor Economics, University of Chicago Press, vol. 37(2), pages 351-398.
    29. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2008. "Markets versus governments," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 159-189, January.
    30. Sweet, Cassandra & Eterovic, Dalibor, 2019. "Do patent rights matter? 40 years of innovation, complexity and productivity," World Development, Elsevier, vol. 115(C), pages 78-93.
    31. Malhotra, Neil & Monin, Benoît & Tomz, Michael, 2019. "Does Private Regulation Preempt Public Regulation?," American Political Science Review, Cambridge University Press, vol. 113(1), pages 19-37, February.
    32. Jing Cao & Richard Garbaccio & Mun S. Ho, 2009. "China's 11th Five-Year Plan and the Environment: Reducing SO 2 Emissions," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(2), pages 231-250, Summer.
    33. Fu, Tong & Jian, Ze, 2018. "Property rights protection, financial access and corporate R&D: Evidence from a large representative sample of Chinese firms," Economic Systems, Elsevier, vol. 42(2), pages 332-345.
    34. Jing‐Lin Duanmu & Maoliang Bu & Russell Pittman, 2018. "Does market competition dampen environmental performance? Evidence from China," Strategic Management Journal, Wiley Blackwell, vol. 39(11), pages 3006-3030, November.
    35. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    36. Ibanez, Marcela & Blackman, Allen, 2016. "Is Eco-Certification a Win–Win for Developing Country Agriculture? Organic Coffee Certification in Colombia," World Development, Elsevier, vol. 82(C), pages 14-27.
    37. Karen Palmer & Wallace E. Oates & Paul R. Portney & Karen Palmer & Wallace E. Oates & Paul R. Portney, 2004. "Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?," Chapters, in: Environmental Policy and Fiscal Federalism, chapter 3, pages 53-66, Edward Elgar Publishing.
    38. Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 1-35.
    39. Zhuang Miao & Tomas Baležentis & Zhihua Tian & Shuai Shao & Yong Geng & Rui Wu, 2019. "Environmental Performance and Regulation Effect of China’s Atmospheric Pollutant Emissions: Evidence from “Three Regions and Ten Urban Agglomerations”," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 211-242, September.
    40. Ali, Saleem H., 2020. "Environmental urgency versus the allure of RCT empiricism," World Development, Elsevier, vol. 127(C).
    41. Georges Enderle, 2018. "How Can Business Ethics Strengthen the Social Cohesion of a Society?," Journal of Business Ethics, Springer, vol. 150(3), pages 619-629, July.
    42. J. Vernon Henderson & Adam Storeygard & David N. Weil, 2012. "Measuring Economic Growth from Outer Space," American Economic Review, American Economic Association, vol. 102(2), pages 994-1028, April.
    43. Shi, Xinzheng & Xu, Zhufeng, 2018. "Environmental regulation and firm exports: Evidence from the eleventh Five-Year Plan in China," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 187-200.
    44. Ma, Debin & Rubin, Jared, 2019. "The Paradox of Power: Principal-agent problems and administrative capacity in Imperial China (and other absolutist regimes)," Journal of Comparative Economics, Elsevier, vol. 47(2), pages 277-294.
    45. Coad, Alex, 2019. "Persistent heterogeneity of R&D intensities within sectors: Evidence and policy implications," Research Policy, Elsevier, vol. 48(1), pages 37-50.
    46. Joseph E. Aldy & William A. Pizer & Keigo Akimoto, 2017. "Comparing emissions mitigation efforts across countries," Climate Policy, Taylor & Francis Journals, vol. 17(4), pages 501-515, May.
    47. Baksi, Soham & Bose, Pinaki, 2016. "Informal sector, regulatory compliance, and leakage," Journal of Development Economics, Elsevier, vol. 121(C), pages 166-176.
    48. Maarten J. Voors & Eleonora E. M. Nillesen & Philip Verwimp & Erwin H. Bulte & Robert Lensink & Daan P. Van Soest, 2012. "Violent Conflict and Behavior: A Field Experiment in Burundi," American Economic Review, American Economic Association, vol. 102(2), pages 941-964, April.
    49. Alberto Ades & Rafael Di Tella, 1997. "The New Economics of Corruption: a Survey and Some New Results," Political Studies, Political Studies Association, vol. 45(3), pages 496-515, August.
    50. Michael E. Porter & Claas van der Linde, 1995. "Toward a New Conception of the Environment-Competitiveness Relationship," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 97-118, Fall.
    51. Feng, Lingbing & Fu, Tong & Kutan, Ali M., 2019. "Can government intervention be both a curse and a blessing? Evidence from China's finance sector," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 71-81.
    52. Matilde Bombardini & Bingjing Li, 2016. "Trade, Pollution and Mortality in China," NBER Working Papers 22804, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fu, Tong & Yang, Siying & Jian, Ze, 2022. "Government support for environmental regulation: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 83(C).
    2. Tong Fu & Ze Jian & Youwei Li, 2023. "How state ownership affects corporate R&D: An inverted‐U‐shaped relationship," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3183-3197, July.
    3. Ren, Shenggang & Hu, Yucai & Zheng, Jingjing & Wang, Yangjie, 2020. "Emissions trading and firm innovation: Evidence from a natural experiment in China," Technological Forecasting and Social Change, Elsevier, vol. 155(C).
    4. Liu, Wei & Zhao, Zhihui & Wen, Zhao & Cheng, Shixiong, 2022. "Environmental regulation and OFDI: Evidence from Chinese listed firms," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 191-208.
    5. Fu, Tong, 2020. "The dilemma of government intervention in a firm's financing: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 71(C).
    6. Martínez-Zarzoso, Inmaculada & Bengochea-Morancho, Aurelia & Morales-Lage, Rafael, 2019. "Does environmental policy stringency foster innovation and productivity in OECD countries?," Energy Policy, Elsevier, vol. 134(C).
    7. Zhang, Ming & Zhao, Yingxue, 2023. "Does environmental regulation spur innovation? Quasi-natural experiment in China," World Development, Elsevier, vol. 168(C).
    8. Gao, Yanyan & Zheng, Jianghuai, 2024. "The opposite innovation impacts of air and water pollution regulations: Evidence from the total emissions control policy in China," Journal of Asian Economics, Elsevier, vol. 92(C).
    9. Zhang, Yijun & Song, Yi, 2022. "Tax rebates, technological innovation and sustainable development: Evidence from Chinese micro-level data," Technological Forecasting and Social Change, Elsevier, vol. 176(C).
    10. Fu, Tong, 2021. "What provides the micro-foundation of monetary policies in the absence of mature economic institutions?," International Review of Financial Analysis, Elsevier, vol. 73(C).
    11. Baxamusa, Mufaddal & Jalal, Abu, 2024. "Environmental regulations, agency costs, and firm performance," Research in International Business and Finance, Elsevier, vol. 70(PA).
    12. Fu, Tong & Chang, Dongfeng & Miao, Chenglin, 2022. "Fuel regulation in a developing country: An interventional perspective," Energy Economics, Elsevier, vol. 113(C).
    13. Amann, Juergen & Cantore, Nicola & Calí, Massimiliano & Todorov, Valentin & Cheng, Charles Fang Chin, 2021. "Switching it up: The effect of energy price reforms in Oman," World Development, Elsevier, vol. 142(C).
    14. Peng, Jiaying & Xie, Rui & Ma, Chunbo & Fu, Yang, 2021. "Market-based environmental regulation and total factor productivity: Evidence from Chinese enterprises," Economic Modelling, Elsevier, vol. 95(C), pages 394-407.
    15. He, Wenjian & Chen, Xiaoyang & Liu, Zhiyong John, 2022. "Can anti-corruption help realize the “strong” Porter Hypothesis in China? Evidence from Chinese manufacturing enterprises," Journal of Asian Economics, Elsevier, vol. 80(C).
    16. Xu, Jian & Sheng, Yan, 2023. "Regulations, politics, and firm green innovation," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 13-32.
    17. Hamaguchi, Yoshihiro, 2023. "Environmental tax evasion as a determinant of the Porter and pollution haven hypotheses in a corrupt political system," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 610-633.
    18. Liu, Duan & Yu, Nizhou & Wan, Hong, 2022. "Does water rights trading affect corporate investment? The role of resource allocation and risk mitigation channels," Economic Modelling, Elsevier, vol. 117(C).
    19. Hille, Erik & Althammer, Wilhelm & Diederich, Henning, 2020. "Environmental regulation and innovation in renewable energy technologies: Does the policy instrument matter?," Technological Forecasting and Social Change, Elsevier, vol. 153(C).
    20. Michael Peneder & Spyros Arvanitis & Christian Rammer & Tobias Stucki & Martin Wörter, 2022. "Policy instruments and self-reported impacts of the adoption of energy saving technologies in the DACH region," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(2), pages 369-404, May.

    More about this item

    Keywords

    China; Corporate innovation; Corruption; Environmental regulat ion;
    All these keywords.

    JEL classification:

    • P39 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Other
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolec:v:183:y:2021:i:c:s0921800921000276. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolecon .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.