The Effect of Environmental Regulations on the Profitability of Philippine SMEs
AIM RSN PCC Discussion Paper 2020-002
32 Pages Posted: 2 Oct 2020 Last revised: 27 Apr 2021
Date Written: August 17, 2020
Climate change, attributed to the increasing use of greenhouse gases, has caused the intensification of storms, the rise in sea levels, and other natural disasters. The implementation of environmental regulations is important especially in the context of the Philippines, which is among the most vulnerable countries to the consequences of climate change. Nevertheless, Philippine SMEs, which significantly contribute to national employment and gross value added, may have to deal with environmental regulations that may negatively affect their financial performance and competitiveness. This paper is among the first to explore the relationship between environmental regulations and profitability of Philippine SMEs (as determined by profit growth rate). Based on a sample of 590 SMEs located in Metro Manila, Metro Cebu, and Metro Davao, our results show a statistically insignificant relationship between environmental regulations and profit growth rate among Philippine SMEs. However, we find a positive relationship between a low perceived extent of corruption and profit growth. Our results also indicate that the interaction of environmental regulation burden and low perceived extent of corruption among SMEs has a positive relationship with profit growth, suggesting that when firms perceive corruption to be low, more environmental regulation may have a positive effect on profit growth. Our findings suggest that, among others, the government must strengthen the implementation of anti-corruption initiatives to help improve the ease-of-doing business.
Keywords: Corruption, Environmental Regulation, Governance, Philippines, SMEs
JEL Classification: D73, G18, H11, L26
Suggested Citation: Suggested Citation