Environmental Regulation, Firm Heterogeneity, and Firm Performance: Direct and Spillover Effects

Environmental economics and policy research has paid limited attention to interfirm spillover effects on firm-level performance. This study addresses this gap by distinguishing between the direct and spillover effects of environmental regulation and firm-specific resources on firm performance. Using panel data for Korean manufacturing firms, we estimate a dynamic spatial Durbin model (SDM) that accounts for both temporal persistence and spatial dependence. The empirical results provide clear evidence. First, environmental regulation and firm-specific factors—including intellectual capital, physical capital, and organizational slack—exert statistically significant positive direct effects on firms’ sustainable growth rate (SGR). Second, interaction effects are crucial: environmental regulation significantly enhances SGR when combined with organizational slack, highlighting the importance of internal resource conditions. Third, spatial spillover effects are identified only under specific configurations. Environmental regulation generates positive spillover effects when interacting jointly with intellectual capital, physical capital, and organizational slack, rather than as an independent driver. Similarly, physical capital produces spillover effects through its interactions with other firm resources. Importantly, these effects vary across firms. Spillover effects are more pronounced in firms with high absorptive capacity, whereas they are weaker or insignificant in firms with low absorptive capacity. Overall, the findings indicate that environmental regulation affects firm performance primarily through resource complementarities and conditional spatial interactions, offering policy implications for more targeted regulatory design