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The Impact of Environmental Regulation on Firms’ Product Quality: Evidence from Chinese Exporters

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Abstract

This paper examines the impact of two wastewater regulations on export product quality in China. Using a difference-in-differences approach and detailed data at the firm-product-country-year level, the study finds that overall product quality improves by 2%. Specifically, the first regulation leads to a 4.8% improvement, while the second regulation, which has stricter standards, results in a 9.3% decline in product quality. However, when aggregating the data at the firm-year level, decomposition analysis suggests that both regulations’ intensive and extensive marginal effects almost equally improve product quality. Mechanistic analyses attribute the positive impact of the first regulation to advanced equipment adoption, innovation enhancement, and changes in firms’ composition and products. Conversely, the negative effect of the second regulation stems from the reduction in the scale of firms producing high-quality products. Moreover, despite higher production costs and reduced labor demand, the first regulation enhances firms’ competitiveness, while the second regulation diminishes their competitiveness.

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Notes

  1. The FT group includes Suzhou City, Wuxi City, Changzhou City, Danyang and Jurong County in Zhenjiang City, and Lishui and Gaochun County in Nanjing City.

  2. According to official investigations, cyanobacteria outbreaks are due to adverse meteorological and hydrological conditions such as high temperature, low rainfall, and low water levels.

  3. Although the policy was published in September 2007 and was planned to be implemented in January 2008, Ten Years of Pollution Control in Lake Tai (2019) shows that the policy was implemented immediately after the pollution event in May 2007.

  4. Shanghai, Jiangsu, and Zhejiang belong to the Yangtze Delta. In 2004, the Jiangsu, Zhejiang, and Shanghai governments issued a declaration of regional environmental cooperation to promote regional environmental protection beyond administrative boundaries.

  5. I drop the firms if any of the following is observed: (1) sales revenue is less than 5 million (CNY); (2) the main financial variables (such as total assets, annual payroll, intermediate input, and gross output) are less than or equal to zero; (3) the number of employees hired by a firm is less than 10; (4) fixed assets and liquid assets are greater than total assets; (5) income tax cannot be greater than total assets or sales profit; (6) the depreciation of the current year is greater than the accumulated depreciation; and (7) the established time is obviously wrong (e.g., the establishment month is larger than twelve or less than one and the established year is later than 2008 or earlier than 1900).

  6. The adjusted variables include total assets, fixed assets, currency assets, profits, subsidy, production costs, intermediate input, export price and value, and import price and value.

  7. Because a few corporate custom codes match multiple firms in the CASIF database, I manually delete incorrectly matched ones, such as the matched names are obviously not the same firm.

  8. For example, a firm name is “hang zhou you jun gong yi pin you xian gong si”, but the name of some observations in the CASIF database have incorrectly written as “hang zhou you jun zhen zhi pin you xian gong si zong cai.” Moreover, these incorrect names only have the same zip code in the two databases, so they cannot be matched by the method from the first part. However, the observations with the correct name can be matched by name, which enables me to figure out the firm in another year by the corporate code in the CASIF database even though its name is incorrect. Hence, my method matches the firms with incorrect names in my second part.

  9. Private firms contain hybrid or collective firms; foreign-owned firms contain firms from Hong Kong, Macau, and Taiwan.

  10. According to NBS, large-sized industrial firms are defined as those with more than 2000 employees, sales above 300 million yuan, and total assets above 400 million yuan. Medium-sized firms are defined as those with between 300 and 2000 employees, sales between 30 million and 300 million yuan, and total assets between 40 million and 400 million yuan. Small-sized firms are defined as those with less than 300 employees, sales below 30 million yuan, and total assets below 40 million yuan; however, because the number of large-sized firms is small, I classify large and medium firms into the same category.

  11. Industry 1712 refers to the cotton, chemical fiber printing, and dyeing finishing sub-industry; industry 1723 refers to the hair dyeing finishing sub-industry; and industry 1743 refers to the silkscreen dyeing and finishing sub-industry.

  12. Following Khandelwal et al. (2013), \(\sigma\) in the TPD industry equals four.

  13. Since the period between the policy announcement and implementation in the FT group is short, I do not control the anticipation effect of the FT group but provide a discussion in the robustness checks section.

  14. Due to the collinearity problem, I do not control the anticipation effect of the ST group in Graph (a).

  15. I convert all the semi-logarithmic model coefficients in my paper into linear regression model coefficients by using \(e^{coefficient}-1\).

  16. Separate results for the FT and ST groups are shown in Table A2 in Appendix D.

  17. Export costs encompass transportation costs as well as costs arising from disparities in cultural, political, and international relationships.

  18. Similar results are obtained when measuring transportation costs by using the straight-line distance between China and destination countries.

  19. More detailed information on the specification and data are shown in Appendix C.

  20. More detailed information about the data is reported in Appendix B.

  21. More detailed information for the data is reported in Appendix B.

  22. The consensus view from government reports and news is that the recession began affecting China in 2008, particularly in the second half of the year.

  23. In China, hiring short-term workers allows firms to significantly reduce costs as they are not obligated to provide various forms of insurance and housing funds for these employees. Short-term workers are also not typically included in the total employee count.

  24. A product’s entry or exit could be due to the firm’s or product’s entry or exit.

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Acknowledgements

I am thankful to Timo Goeschl and the anonymous referees for their valuable feedback and constructive comments. I also extend my gratitude to Lucija Muehlenbachs, Trevor Tombe, and Stefan Staubli for their insightful comments and guidance. Additionally, I appreciate the contributions of Sheila Olmstead, Werner Antweiler, Alexander Whalley, M. Scott Taylor, Martino Pelli, Eugene Beaulieu, Shaoda Wang, Chi Man Yip, Feng Wei, Qiongda Zhao, Liang Chen, and the seminar participants at the University of Calgary, AERE in the US, GoSee in the US, CREEA Ph.D. workshop in Canada, MWIEDC at Purdue University, and EEA in Boston for their valuable feedback and constructive insights.

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  1. Alberta School of Business, University of Alberta, 3-23 Business Building, Edmonton, AB, T6G 2R6, Canada

    Longzhou Wang

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Research Interests: Environmental Economics, International Trade, and Development Economics.

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Wang, L. The Impact of Environmental Regulation on Firms’ Product Quality: Evidence from Chinese Exporters. Environ Resource Econ 86, 645–672 (2023). https://doi.org/10.1007/s10640-023-00806-1

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