Abstract
In the globalized world, factors, such as environmental regulations and outcomes, are interlinked with foreign direct investment and technological innovation. However, firm-level theories mostly treat them independently. We have filled the gap by carrying out empirical research with an integrated approach at the firm level. The theoretical framework is based on Porter’s hypothesis and the pollution haven hypothesis/pollution halo hypothesis. We collect the data from the center for monitoring Indian Economy Prowess IQ and the Ministry of Environment, Forest, and Climate Change. Using the modified Krugman specialization index, we find that Indian manufacturing firms are neither converging nor specialized in terms of technical progress. Estimating a z-score for environmental stringency, we interact that with the pollution loads of the firms. Our findings suggest that environmental regulation does not ensure a “win–win” situation for the producers, refuting Porter’s hypothesis. Rather, factors such as profit margin and R&D produce robust results across different models to induce the productivity of the firm. One of the concerning facts is older firms using vintage capital are detrimental to productivity enhancement, and there is evidence of layoff at the cost of increasing profits to improve the firm performance. Also, more dependence for export-intensive firms on material increases the cost and, thereby, reduces productivity. In addition, we apply a panel threshold regression model and conclude that there is evidence of a single threshold, and irrespective of the choice of technology foreign firms induces the energy intensity, confirming a pollution Haven hypothesis.
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Notes
Environment is considered to be a factor of production.
One of the threat perceptions is that the resource-rich countries are vulnerable to PHH, known as the resource curse hypothesis, although the evidence is mixed (Liang et al. 2023).
India imports a large volume of non-renewable resources despite a large volume of production, and this has been increasing over the years (Energy Statistics 2023). A substantial part of it is exported as it does not meet the environmental standard. As there is an excess demand for the same, they import it from the developed countries. A part of this import might be the surplus that does not meet environmental standards in those countries, and the laxity of regulations may induce the threat of both PH and PHH/PHaH.
To the best of our knowledge, this is the first empirical paper to integrate PH and PHH for Indian manufacturing firms.
Since PH incentivizes the firms with a “win–win” situation, the decision of the firm will be taken based on the possibility of the improvement of their outcome. Often this is measured in terms of total factor productivity (TFP).
In this paper, we are not interested in focusing on the narrow version because: i. The interest of the paper does not lie in validating this; and ii. there is an acute shortage of the data.
The list of the indicators will be discussed later. Input intensities refer to labor intensity, capital intensity, material intensity, and energy intensity.
Z = (Xit-Xt)/σit.
Intensities are not considered separately to omit the problem of correlation and multicollinearity problems as these variables are used while calculating the TFP.
We have not reported the green firms as it will be considered as base in the regression models.
There is a possibility of the existence of a nonlinearity; specifically, it may have an exponential effect. This may lead to the probabilistic measures to cross their bounds.
As a rule of thumb, we have tested for multicollinearity, stationarity, and cointegration. Since the independent variables have VIFs less than 10, they are found to be non-colinear. Besides, they are stationary in the first difference, and they are found to exhibit a long-term relationship due to the significant cointegration.
We have calculated the mean spending on R&D by domestic and foreign firms. It is seen that foreign firms are spending four to five times more on R&D than domestic firms.
We have tested the correlation of the dependent variable and the covariates. It exhibits that tax and profit are highly correlated (0.49), and hence, we keep both of them in separate regression and compare them. This was carried out for the unbalanced panel as well, but in that case, the correlation was less than 0.3.
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The paper is presented in the SHADG 2024 Conference, CoE-SEA, IIT Kharagpur. The authors are highly benefitted with the valueable comments and suggestions received by the reviewers and the editor of the paper.
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Bagchi, P., Sahu, S.K. The conundrum of porter hypothesis, pollution haven hypothesis, and pollution halo hypothesis: evidence from the Indian manufacturing sector. Clean Techn Environ Policy (2024). https://doi.org/10.1007/s10098-024-02886-z
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DOI: https://doi.org/10.1007/s10098-024-02886-z