Environmental Regulations, Corporate Social Responsibility, and Innovation: Evidence from Vietnamese SMEs

Climate change and global warming incite countries to adopt a sustainable development strategy. Many countries consider environmental policies an efficient tool in such a context. Despite a rich literature on the relationship between environmental regulations and the firm's innovation, it almost relies on its environmental practices, but not the whole interaction between the firm and its stakeholders. This research investigates the nexus between environmental regulations, CSR, and innovation. This research relies on panel data on Vietnamese Small and Medium Enterprises between 2013 and 2015. To investigate whether the LEP 2014 implementation incites firms to be more innovative, either through changes in their environmental practices or CSR strategy, we perform a difference-in-difference estimator. This method could be relevant to explore the causal relations of an intervention or treatment on outcome variables. It also allows us to control for potential biases from the group- and time-invariant factors. Besides, we also provide some robustness estimations, including the placebo test, another measurement of innovation, and the potential endogeneity of Environmental treatments and CSR strategy. We first conduct the firm's innovation, environmental treatments, and CSR indexes. The CSR index includes three components: an environmental treatments index, a working conditions index, and a governance index. Our estimated results likely support the idea that the LEP 2014 implementation incites SMEs to improve their innovation capacity. Indeed, such a regulation obligates firms to enhance both their environmental practices and CSR strategy, which, in turn, encourages them to become more innovative. These conclusions still through different robustness verifications. As a first policy implication, a significant diffusion of the LEP 2014 would be predominant. Second, there would be measures that incite firms to improve their environmental treatment. Besides, while environmental regulations may stimulate innovation, their effectiveness requires supplementation with other incentive measures. For example, it is crucial to have supportive or incentive measures aimed at promoting CSR. Dialogue with stakeholders lies at the heart of an effective CSR strategy.