Environmental Regulation, Compliance Strategies, and Productivity: Evidence from China

Abstract

The strong version of the Porter hypothesis indicates that environmental regulations may cause firms to become more productive. However, using a difference-in-differences regression model with propensity score matching, we find that more stringent wastewater discharge requirements faced by textile, printing, and dyeing firms significantly reduced their total factor productivity (TFP) by 13%-14%. We advance the literature by providing evidence that more stringent regulation has a larger negative TFP effect on firms that rely more heavily on end-of-pipe abatement strategies rather than change-in-production-process techniques. Moreover, most of the negative TFP effects of the stricter environmental regulation occur at domestically owned private firms