Environmental regulation and firms' product mix: The role of firms' product-specific capabilities

Abstract

Understanding how firms respond to environmental regulation through product-mix decisions is critical to assessing the broader impact of such policies. This paper contributes to the literature by incorporating intra-firm dynamics and examining how these interact with firms’ capabilities to adjust their product scope and mix in response to environmental regulations, which are influenced by the costs of these adjustments. The empirical evidence suggests that targeted firms reallocated resources away from pollution-intensive products, indicating the policy’s effectiveness. Moreover, the relationship between environmental regulations and firms’ product-mix decisions is contingent on their ability to adapt their portfolios. Lastly, firms with different ownership structures display varying capacities to develop and sustain particular products.