The Effect of Formal and Informal Regulations on Industrial Effluents and Firm Compliance Behavior in Malaysia

Abstract

Abstract The rapid development of the manufacturing sector has been causing industrial effluents pollution. The practice of environmental regulation in the emerging economy focused on the externalities impact of industrialization. In conjunction with the issue, this study examines the effect of formal and informal regulation on the industrial effluent act and the firm compliance behavior in Malaysia. This quantitative study uses a survey questionnaire (structured) and involved 42 factories of three industries, namely food and beverages, textiles, and paper in Penang, Kedah, and Perlis. The data were analyzed using non-parametric tests: The Chi-Square, Mann-Whitney, and Spearman’s Rho. This study uses the firm behavior theory as the framework, and our non-parametric analyses showed that the traditional enforcement and fined probability could significantly affect compliance levels. We also find the market, consumer, competitor, and investor pressure positively influence firm compliance. The empirical results suggest effective enforcement of environmental regulation and the role of non-regulation must be empowered as a support mechanism for pollution control.