Does environmental regulation affect capital-labor ratio of manufacturing enterprises: Evidence from China

Wenyun Yao, Yi Zhang, Jingwen Ma and Guanghui Cui

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: Currently, China faces the dual pressures of finding ways to address the unstable ecological environment improvement and rising labor costs. All sectors of society are concerned about how to perfect the structure of enterprise factors input to improve production efficiency and adapt to high-quality economic development. This paper examines the impact of environmental regulation on the capital-labor ratio of manufacturing enterprises in China. The results indicate that the implementation of the new EPL (Environmental Protection Law) increases the capital-labor ratio of heavy polluting manufacturing enterprises. This conclusion is still robust to parallel trend tests, considering sample selection bias, random factors, as well as expected effects. Enterprises response to the new EPL by increasing capital factors input and hiring high-skilled labor, which is in line with the capital-skill complementarity hypothesis and reflects the views of Karabarbounis and Neiman (2014). In addition, this study investigates the effects of capital deepening on the production and operational efficiency of heavy-polluting manufacturing firms. Results show that the implementation of the new EPL can facilitate the reduction of enterprise's production costs and the improvement of total factor productivity.

Keywords: Environmental regulation; Capital-labor ratio; Green manufacturing; Capital-skill complementarity; Factor reallocation (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000017

DOI: 10.1016/j.irfa.2023.102485

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