The Relationship Between Environmental Policy and Productivity Considering Dynamic Perspective: Focusing on Manufacturing Firms

This study analyzed the effect of increasing environmental policy stringency on a firm's TFP from a dynamic perspective. For the analysis, the TFP of Korean manufacturing firms was estimated from 2006 to 2018, and the OECD's environmental policy stringency index was used. The baseline model was set to represent that one-year lag of environmental policy stringency affects TFP. And environmental policy stringency was considered by dividing it into Korea's environmental policy stringency and relative environmental policy stringency. The analysis model took a dynamic perspective by considering the persistence of TFP shock and the persistence of environmental policy stringency. Dynamic panel analysis was conducted to consider the persistence of TFP shocks, and the Porter hypothesis was tested by changing the time lags of environmental policy stringency. As results, it was found that the increase in one-year lag of environmental policy stringency decreased firm's TFP. This was shown in Korea's environmental policy stringency as well as in the relative environmental policy stringency. However, the increases in two-year and three-year lags of environmental policy stringency were shown to lead to productivity improvement, showing that the Porter hypothesis was supported after two periods. This result supports the Porter hypothesis as a more long-term phenomenon.