Working Paper
The role of environmental regulations and innovation in TFP convergence

This is a pioneer study investigating the relationship between environmental compliance and TFP convergence for SMEs. It examines the impacts of environmental compliance, and its combination with innovation, on TFP convergence of manufacturing SMEs. We applied the dynamic panel regression method to estimate stochastic TFP.

We find evidence of a β-convergence but a σ-divergence. Impacts of environmental practices of firms—pollution abatement and control expenditure, and environmental treatment—are only significant through their interaction with innovation. The β-convergence in firms’ TFP is influenced by their industrial identity, while firms’ size and investment have marginal impacts.