Going Green, Going Global: How Environmental Regulations Foster GVC Integration

This paper examines how environmental stringency influences firms' participation in Global Value Chains (GVCs) in developing countries. Using the World Bank Enterprise Surveys data, we analyse the effects of domestic environmental regulations and environmental treaties on both the extensive and intensive margins of GVC participation. Our findings reveal that domestic environmental regulations increase firms' likelihood of GVC integration under both simple and strict definitions, lending support to the Porter Hypothesis. Additionally, we find that these positive effects are amplified when firms invest in R&D. Both SMEs and large firms benefit from environmental stringency, with SMEs particularly gaining when they hold foreign certification and have foreign ownership. However, the effect of environmental treaties remains inconclusive, likely due to weak enforcement or vague provisions. The results remain robust in different specifications and after controlling for the endogeneity of such regulations and treaties.