Regulatory Stringency, Green Production Offsets and Organizations' Financial Performance

Abstract

While some scholars have argued that environmental regulatory pressures constrain organizations' financial opportunities, others maintain that environmental regulations can spur product and technology innovations and encourage greater operational efficiencies. Advocates on both sides have evidence in support of their positions. However, when considering both perspectives in tandem and recognizing that other factors (which are correlated with a company's environmental performance) may be associated with improved financial performance, we may find that neither position is valid or both are. Relying on OECD data for manufacturing facilities operating in Canada, France, Germany, Hungary, Japan, Norway, and the United States, this study shows that more stringent environmental policy regimes are related to diminished firm profits. Yet, organizations that are motivated by a green production focus (i.e., enhancing internal efficiencies and new product and technology development) are more likely to improve their environmental performance. They also demonstrate a greater probability of benefiting financially, thereby offsetting the cost of regulation or accruing a net gain.

Keywords: environmental regulation, environmental performance, financial performance, environmental efficiency, regulatory stringency, innovation

JEL Classification: M14, N60, M11