Major government customer and corporate environmental responsibility: Evidence from China

A critical strategic choice for corporate governance is how a firm can take sufficient environmental responsibility to satisfy its key stakeholders. Our paper answers this question by studying how corporate environmental responsibility is affected when a firm’s major customer is the government. Using a two-way fixed effects model with a sample of 5672 Chinese manufacturing firms, we show that having a government customer is associated with a 15% higher corporate environmental responsibility score. Moreover, a 10% increase in the share of government purchase in the supplier’s sales revenue is associated with up to a 6% increase in the suppliers’ corporate environmental responsibility score. The relative bargaining advantage in the supply chain plays a moderating role in the association between a major government customer and suppliers’ corporate environmental responsibility efforts, where the positive impact is more pronounced in firms operating in competitive industries, at a small scale, and with high trade credit. Our paper thus highlights visible business relationship as a new driving force for corporate environmental responsibility. Our results also suggest that when transacting business with their suppliers, local governments should reconsider how to utilize their advantageous positions to encourage firms to take more environmental responsibility.