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Does Environmental Regulation Shape Entrepreneurship?

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Abstract

This study investigates the causal effect of environmental regulation on entrepreneurship. By using China’s Two Control Zones policy in 1998 as an exogenous shock and a novel dataset about firm creation, our difference-in-differences-in-differences estimation shows that environmental regulation significantly deters entrepreneurship in pollution-intensive industries. Our results are robust to a series of endogeneity and robustness tests. A plausible mechanism is that the stringent regulation increases firm’s production costs, thus reducing expected profits and crowding out entrepreneurship. Moreover, we find that environmental regulation has a sizable and statistically significant effect only on entrepreneurship in areas with low corruption, high institutional quality, as entrepreneurs can hardly evade regulations through rent-seeking activities or other means.

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Notes

  1. For example, Levinson (1996) and Eskeland and Harrison (2003). In a related study, Dean, Brown, and Stango (2000) find that a greater intensity of environmental regulation is associated with fewer small business formations, however there is no effect on the formation of large establishments. List, Mchone, and Millimet (2004) shows that while domestic firms are influenced by environmental regulations, foreign firms are not use a unique county-level database for New York State from 1980 to 1990.

  2. For example, Henderson (1995), Becker and Henderson (2000), and List, Millimet, Fredriksson, and Mchone (2003). For literature reviews, see Jeppesen, List, and Folmer (2002) and Brunnermeier and Levinson (2004).

  3. To enforce the policy, the National Environmental Protection Bureau (NEPB) was established, and the targets for environmental controls were clearly posited by the State Council (China’s cabinet) for the short run and the long run. This context alleviates the concern that government policies are often poorly carried out in developing countries, which leads to the weak findings (Cai et al. 2016). For details about environmental regulations in China, see Sect. 2.1.

  4. Tian and Xu (2020) use SAIC registration data to measure entrepreneurship and find a positive effect of the establishment of national high-tech zones on local innovation and entrepreneurship. Based on the same dataset, Kong and Qin (2021) find a positive effect of China’s anti-corruption campaign on entrepreneurship. Black and Strahan (2002) and Kerr and Nanda (2009) use US business creation data to measure entrepreneurship and examine the relationship between financial constraints and firm entry and survival. Similarly, Guzman and Kacperczyk (2019) use data on the entire population of businesses registered in California and Massachusetts and find that female-led ventures are less likely than male-led ventures to obtain external funding.

  5. China had applied a series of regulatory policies prior to the TCZ policy to reduce air pollution, i.e., the Air Pollution Prevention and Control Law of the People’s Republic of China (APPCL) was enacted in 1987 and came into force in 1988 (Cai et al. 2016). The levy system introduced in 1992 imposed fees on plants according to their emissions. In 1995, the APPCL was amended, and a section about the regulation of air pollution and SO2 emissions was included. However, the limited evidence on these policies suggests that they (which were identical across locations and industries) were not yet possible to control air pollution effectively. The effect, if any, of these earlier policies should be captured in our regressions by industry-year and city-industry fixed effects (Hering and Poncet 2014).

  6. Specifically, a city was designated as an SO2 pollution control zone if (1) its average annual ambient SO2 concentration had been larger than the national Class II standard in recent years (i.e., 60 μg/m3); (2) its daily average ambient SO2 concentrations exceeded the national Class III standard (i.e., 250 μg/m3); or (3) its SO2 emissions were significant. A city was designated as an acid rain control zone if (1) the average pH value of its precipitation was equal to or less than 4.5; (2) its sulfate deposition was above the critical load; or (3) its SO2 emissions were large (Cai et al. 2016).

  7. For detailed information on the two control zones list, please refer to: http://www.gov.cn/zhengce/content/2010-11/22/content_5181.htm.

  8. First, new collieries based on coal with a sulfur content of 3% and above were prohibited, and existing collieries using a similar quality of coal had to reduce the production gradually or be shut down. Second, new coal-burning thermal power plants were prohibited in city propers and in suburbs of large or medium cities, except for cogeneration plants whose primary purpose was to supply heat. Furthermore, newly constructed or renovated coal-burning thermal power plants using coal with a sulfur content of 1% and above had to install sulfur-scrubbers, while existing power plants using similar quality coal had to adopt SO2 emission-reduction measures by 2000. Third, in polluting industries such as the chemical engineering, metallurgy, nonferrous metals and building materials industries, production technologies and equipment generating severe air pollution had to be phased out. Finally, local governments had to strengthen the collection, administration, and use of SO2 emission fees (State Council, 1998; Hering and Poncet 2014; Cai et al. 2016).

  9. We follow Cai et al. (2016) to use the SO2 emission level in 2004 as our main measure of the degree of pollution, since the SO2 emission data in 1997 (which is the year immediately before TCZ policy) were only available for around 20 industries compared with 37 industries in 2004, which leads to a substantial reduction in the cross-industry variations, as well as there is a high correlation (0.9336) between the SO2 emission levels in 1997 and that in 2004 for the 15 common industries, which suggests that the industry aggregate SO2 emission levels were quite persistent during our research period; nonetheless, our results remain the same using SO2 emission levels in 1997 or 2001 (the first year in which 37 industries were collected in the Chinese Environmental Yearbooks).

  10. In March 2018, according to the reform plan of the State Council approved by the first session of the Thirteenth National People’s Congress, the State Administration for Market Regulation was established to perform all or part of the duties of some institutes, including SAIC.

  11. The standalone terms and the double interaction terms are subsumed by the fixed effects in our specification.

  12. The balance tests are reported in Appendix Table 10, we find that there are no significant differences in city characteristics between the two groups of cities after matching.

  13. For instance, for cities located on the Baoji city border, we obtained the proportion of all contiguous eastern neighbors (the jet stream most of the time flows from east to west in Baoji city in a year) that are TCZ cities to form the appropriate instrument.

  14. Since the top two frequency of the wind direction of some cities is non-continuous, we cannot construct IV in these cities accordingly, thus our sample reduced a lot here.

  15. The four municipalities are Beijing, Tianjin, Shanghai, and Chongqing.

  16. Our results in Tables 4, 5, and 7 are robust when using IV specification, the detailed results are available from the authors on request.

    Table 5 Alternative policies
    Full size table

  17. WBES was undertaken in 2004 in collaboration with the Enterprise Survey Organization of the Chinese National Bureau of Statistics (NBS), and over 124,000 firms from China were surveyed with a standard questionnaire. The main purpose was to identify the driving factors behind and obstacles to enterprise performance and growth in countries. Please refer to Barth, Lin, Lin, and Song (2009) for more detailed information about this dataset.

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Acknowledgements

We thank Robert Elliott (the editor), two anonymous referees, Chen Lin, Shasha Liu, and seminar participants at Jinan University, Sun Yat-sen University, and Zhongnan University of Economics and Law for helpful comments. We acknowledge the financial support of the Major Project of National Social Science Foundation of China (grant no. 21ZDA010). All authors contributed equally to this paper. The usual disclaimer applies.

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  1. Dongmin Kong, School of Economics, Huazhong University of Science and Technology, 430074, Wuhan, China

    Dongmin Kong

  2. Ni Qin, School of Economics, Huazhong University of Science and Technology, Wuhan, 430074, China

    Ni Qin

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Appendices

Appendices

See Tables 8, 9, 10, 11.

Table 8 Variable definition
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Table 9 Summary statistics and description of variables before 1998 by city
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Table 10 Balance tests of PSM
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Table 11 Cluster at different level and alternative measurements
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Kong, D., Qin, N. Does Environmental Regulation Shape Entrepreneurship?. Environ Resource Econ 80, 169–196 (2021). https://doi.org/10.1007/s10640-021-00584-8

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