Green Transition and Market Selection: Agri-environmental Policy and Environmentally Friendly Firm Dynamics in China

Existing research on how environmental policy affects firm dynamics has focused mainly on highly polluting firms. By contrast, there is still limited evidence on how such policies shape the entry and exit of green agribusiness. This paper studies a Chinese agricultural environmental policy that combines regulation with incentives and was gradually introduced at the county level from 2017 onward. We treat this rollout as a quasi-natural experiment. Using a staggered difference-in-differences design, we identify the causal effects of agricultural environmental policy on the dynamics of green agriculture-related firms. We find that the policy increased entry by about 10.67 percent and exit by about 9.84 percent among green agriculture-related firms. The evidence points to market selection as the main mechanism. The policy increased market demand for green agriculture from both consumers and agricultural producers. It also raised the revenues and profits of incumbent green agriculture-related firms. In addition, the policy reduced informal costs, especially financing frictions, but did not significantly relax formal institutional barriers. Lower entry costs and stronger market expectations increased the expected returns to entry and encouraged green agribusiness to enter. At the same time, intensified competition pushed less efficient firms out of the market. This pattern is especially pronounced among smaller firms, firms with narrower business scopes, less diversified firms, and firms with weaker profitability. The policy also generated both environmental and economic gains. It reduced methane emissions by about 1.06 percent and nitrous oxide emissions by about 1.68 percent. It also increased nighttime light intensity by about 3.57 percent. Overall, this paper provides new micro-level evidence on how environmental policy shapes green agribusines dynamics. It also offers evidence from China that may inform green structural transformation in agriculture in developing countries.