The Impact of Environmental Regulation Compliance and Market Competitiveness Degree on Performance: The Case of the Portuguese Enterprise Ecosystem

ABSTRACT The EU Directive 2002/96/EC concerning the re‐use, recycling, and other forms of recovery of waste of electrical and electronic equipment (WEEE) sets criteria for collecting, treating, and recovering WEEE. In Portugal, since 2006, firms operating in these industries must comply with the WEEE Directive. In this study, we examine the impact of compliance with this environmental regulation on corporate performance across different degrees of market competitiveness. We collected a sample of Portuguese‐based firms from the electrical and electronic equipment industries from the Orbis Europe database between 2003 and 2022 and identified the ones that comply with the law—the treatment group. Our final sample consists of 219 firms, corresponding to 2718 matched pairs formed of treated and control observations. Our results show no differences in performance between firms that comply (the treatment group) and those that do not (the control group), except for firms operating in more competitive markets. In such cases, compliance negatively affects firms' performance. The profitability of treated firms assigned in the group of high market competitiveness is, on average, three percentage points lower than that of their counterparts. This evidence poses a challenge to the EU regulators, who should focus on enforcing EU Directive to create a common ground across member states to avoid free riders from emerging.