Impact of Environmental Regulation on Productivity: Case Studies of Three Industries in Japan

Abstract

Although fi rms bear the cost of compliance, strict but fl exible environmental regulation may benefi t them by spurring the innovation process. However, the relationship between environmental regulation and productivity is unclear. We calculate productivity growth by using data envelopment analysis; we then conduct regression analysis, using panel data on productivity growth by environmental regulation stringency. A one-year lag of environmental regulation stringency is included in the model. We use data from the automobile, food, and electronics industries in Japan, from the 2003–2009 period. Regarding environmental productivity, the results are likely to support the Porter hypothesis, rather than traditional productivity. The automobile industry's results support the Porter hypothesis in the case of environmental productivity; for traditional productivity, there is the trade-off between environment and economic performance. The results of the food and electronics industries show no positive or negative impact of environmental regulation on traditional or environmental productivity. Different results between the two productivity indices were found for the automobile industry. The benefi ts of achieving higher productivity should accrue to fi rms that can expand output while reducing pollution emissions. Policymakers and managers should make use of environmental productivity in their decision-making process, together with more traditional measures of productivity.