Short-run pain, long-run gain: Desulfurization investment and productivity

This paper examines the strong Porter Hypothesis by exploring the impact of firm's desulfurization investment on productivity in the long and short runs. Our dataset is novelty as we merged and constructed a firm-level panel dataset on coal-fired power firms from 1998 to 2009 in China. Using the panel cointegration econometric approach, we find strong micro-evidence that the decision of desulfurization investment largely stimulates the productivity in the long term, despite it has slightly negative impact in the short run, which reflects the strong Porter Hypothesis holds in the long time dimension and the realizing process is dynamic. Our results are robust after addressing the possible endogeneity and employing various measures as substitutes. Further tests on environmental regulation patterns indicate that desulfurization investment driven by the voluntary regulation is more effective than that from the involuntary regulation in both long and short terms, and the market-based incentive regulation is more qualified than the command-and-control type at least in the long run. In addition, other heterogeneous analyses show that the long- and short-term causalities vary substantially with the patterns of retrofit schemes and regional environmental governance aims. Our results provide valuable policy implications for governments and strategic guides for coal-fired firms.