Abstract
With an emphasis on innovation, Porter (1991) challenges the traditional wisdom and then hypothesizes a promotional effect of environmental regulation on firm performance. This paper reveals a complementary source, i.e., government support, to explain the promotional effect in a developing country. We use evidence from China to find a positive causal effect of environmental regulation stringency on firm performance. To justify our theory, we show that state ownership shares of a firm as an exogenous proxy for government support positively moderate the causal effect. We also use causal mediation analysis to document that loans from banks as the representative type of government support mediates the causal effect significantly in statistics and economics.
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