Market-Based Environment or Property Rights Protection? The Environmental Regulation of a Developing Country

The Porter Hypothesis (1991) stipulates that environmental regulations (ER) should be "tight but flexible" and employ market-based instruments to enhance firm performance. This paper identifies internal property rights protection as a complementary factor that explains the promotional effect of environmental regulations in a developing country where market-based instruments are weak. To support our theory, we present evidence from China showing that state shares can substitute for market-based instruments in upholding the Porter Hypothesis in a developing country. Additional evidence reveals that state shares primarily operate in firms characterized by low bank loan ratios and high information-acquisition costs. The results suggest that an increase in bank loans and a reduction in information-acquisition costs are two key mechanisms through which environmental regulations enhance firm performance in a developing country. Our conclusions offer new insights into rethinking the Porter Hypothesis in developing countries.