Green Growth or Red Tape? Unraveling the Interconnected Effects of Stringent Environmental Regulations and Bribery on Enterprise Growth

Abstract

We study the relationship between environmental regulations and firm performance using World Bank Enterprise Surveys data for manufacturing firms in 142 countries covering 2007 to 2017 period. Existing research offers mix findings on the link and does not consider the role of institutional weaknesses, such as corruption, in the effectiveness of these regulations. To address this gap, we analyze the conditional effects of environmental regulations on firm growth across economies with varying perceptions of corruption. Our findings support the ‘strong’ version of the Porter Hypothesis, suggesting that stricter environmental regulations significantly enhance firm growth. However, when combined with high levels of bribery, these regulations have an adverse effect. The robustness of these results is confirmed by employing various statistical techniques (e.g., IV-GMM) and alternative model specifications.