Safety regulations and firm productivity

Abstract

We investigate the effects of safety regulations on the Total Factor Productivity (TFP) and overall performance of firms. We focus on the industrial safety regulation—the Decision on Further Strengthening Work Safety—implemented in 2004 to address the frequent occurrence of industrial accidents. Industrial safety accidents, due to their potential for causing significant casualties, substantial social impact, and clear accountability in a short timeframe, often receive heightened attention from local government officials, in contrast with environmental pollution incidents. We discovered that safety regulations notably decrease the TFP of firms. Their overall output, profits, export volumes, and other aspects of business performance, including financing costs, are adversely affected. Additionally, innovation initiatives and the number of new entrants also significantly declined. Firms respond to increased costs by reducing labor input, but there is no change in capital input. Furthermore, the study contrasts the differing impacts of industrial safety accidents and environmental pollution incidents. Despite the negative effects of the safety regulations on TFP as well as other economic outcomes, there are social welfare gains caused by the safety regulations. This research provides insights into the interplay between social governance and corporate development. It suggests that when the government engages in necessary social governance, it should provide targeted policy support to offset the negative effects on business operations and create a more favorable business environment.