Environmental Regulation and Firm Exports: Evidence from a Quasi-Natural Experiment in China

Abstract

This research studies the impact of a unique environmental regulatory policy called mandatory Cleaner Production Audit on firm exports from China using matched firm-level data. Employing the difference-in-differences approach to examine this effect shows that firms subject to the mandatory Cleaner Production Audit suffer a relative decline in exports, and this negative effect is stronger when the implementation of mandatory Cleaner Production Audit was substantially improved in the later stage. Heterogeneity analyses present that the stringent environmental regulations barely affect state-owned firms, whereas they are a strong influence on private firms located in the eastern region of China, and have a much larger negative effect on exports of small-size firms relative to large-size firms. Mechanism discussions show that there are both the compliance costs effect and the innovation offsets effect, but the benefits from the innovation offsets effect do not appear to be large enough to outweigh the compliance costs effect for the regulated firms.