Environmental Regulation and Firms’ Extensive Margin Decisions

Shuo Li () and Min Wang ()
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Shuo Li: Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China
Min Wang: China Center for Economic Research, National School of Development, Peking University, Beijing, China

No 22-15, EfD Discussion Paper from Environment for Development, University of Gothenburg

Abstract: The paper provides a comprehensive investigation of the effects of environmental regulations on Chinese firms’ extensive margins. Using registration information of all firms in 35 industries from 1991 to 2010, we show that environmental regulations deter firm entry, increase firm exit and reduce the net entry of firms. Specifically, in response to such regulations, large, long-lived and private entrants are less likely to enter the market, and small and long-lived incumbents are more likely to exit. This concentrates the market and expands the state sector in pollution-intensive industries. Moreover, the entrants are more heavily regulated than incumbents. We also find evidence that, in response to environmental regulations, firms in regulated locations are more likely to create new firms in pollution-intensive industries in unregulated areas. However, these spatial spillover effects are negligible, posing little threat to the estimation of environmental regulatory impacts on firm entry in our setting and therefore alleviating the concern of pollution relocation.

Keywords: Environmental Regulation; Firm Entry; Firm Exit; Equity Investment; Spatial Spillover; Inter-city Investment (search for similar items in EconPapers)
JEL-codes: L51 O44 Q52 Q58 R38 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2022-10-12
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-cna, nep-com, nep-ene, nep-env, nep-reg, nep-res, nep-sbm and nep-ure
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