Does environmental regulation affect the export competitiveness of Chinese firms?

Abstract

Strict environmental governance urges firms to implement higher sustainable production requirements and environmental standards for export products, making it challenging for firms to maintain export competitiveness. This study constructs firm-product level markups as the measure of export competitiveness using microdata of millions of observations from Chinese industrial firms. It then empirically investigates the impact of environmental regulations on those firms' export competitiveness. The empirical study finds: 1) environmental regulations have significantly increased the markups of Chinese firms' export products, indicating that firms' export competitiveness is enhanced, verifying the validity of the Porter Hypothesis. 2) Environmental regulations have a greater effect on increasing the markups of non-core products than that of core products. 3) Environmental regulations have significantly increased the markups for private-owned firms, foreign-invested firms, and firms in the eastern region, but not for state-owned and non-eastern firms. 4) Environmental regulation mainly enhances firms' export competitiveness mainly through the TFP channel. Moreover, a series of robustness tests support the empirical results. This research recognizes the positive achievements and benefits of China's environmental governance. It recommends that the Chinese government strengthen the supervision of state-owned enterprises and help enterprises in economically underdeveloped areas overcome the challenges brought by environmental regulation.