Navigating environmental regulations: The impact on firms’ investments in pollutant purification facilities in China

Abstract

Environmental regulations safeguard public health and the environment by curbing industrial pollution through the restriction of harmful industrial activities. These regulations impose restrictions and strict assessments on the amount of pollutants discharged into the environment, motivating firms to invest in pollutant purification facilities. This study aims to examine the impacts of environmental regulations on firms' investment in such facilities. Using data from publicly listed firms in China's secondary industry from 2010 to 2020, statistical models (i.e., static non-linear, non-linear dynamic, and threshold) are created to examine the impact of various environmental regulations on firms' investments in pollutant purification facilities. The study's empirical analysis reveals several important insights. Firstly, the effects of the various types of environmental regulations on pollutant purification investments exhibit significant variability across firms. Secondly, the impact of environmental constraints, command-and-control policies, and market-based strategies follows a positive “U” shape, while public participation policies demonstrate an inverted “U” shape. Thirdly, the interaction between firm characteristics and the impact of different regulations is notable. Lastly, command-and-control policies exhibit a threshold effect on investment decisions, setting them apart from other regulatory approaches. This study advances current understanding of how environmental regulations shape the investment strategies of Chinese firms in pollutant purification facilities. These findings hold relevance for nations seeking to harness environmental regulations as a potent instrument for enhancing firms' environmental performance.