Economic freedom and corporate environmental responsibility: The role of small government and freedom from government regulation

Abstract

In international scientific literature, it is argued from institutional theory that economic freedom stimulates corporate environmental responsibility. However, economic freedom comprises several different dimensions, such as government size, rule of law, open markets, and (freedom from) government regulation. Whereas previous literature has shown that rule of law and open markets stimulate corporate environmental responsibility, the impact of government size and government regulation on corporate environmental responsibility of companies located in different countries has yet not been explored. This paper contributes to scientific literature by researching the effects of these two dimensions of economic freedom on corporate environmental responsibility. We hypothesize that small government stimulates corporate environmental responsibility and that freedom from government regulation discourages it. Using panel data from ASSET4 for the corporate environmental responsibility of 5023 companies, and data of government size and government regulation from Fraser Institute and Heritage Foundation for 41 countries, the authors perform panel analysis for the period 2005–2014 to test the hypotheses. The estimation results show that both small size of government and freedom from government regulation decrease corporate environmental responsibility. The test results are robust for the type of economic freedom data (Fraser Institute or Heritage Foundation) used.