Regulatory Stringency, Green Production Offsets and Organizations' Financial Performance

Abstract

Some scholars have argued that environmental regulatory pressures constrain organizations' financial opportunities, while 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, considering both perspectives in tandem and recognizing that other factors may be associated with improved financial performance, we may find that neither position is valid, or that both are. Relying on data for manufacturing facilities in seven countries, 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—defined as 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.