Environmental regulation and enterprise behavior in China: rent-seeking or innovation?

While the Porter hypothesis posits that well-functioning markets and government regulations can promote enterprise innovation, it remains less clear in developing and transition economies. To address this gap, we utilize enterprise data from China's A-share market between 2005 and 2017 to empirically examine whether implementing more stringent environmental regulation will prompt regulated enterprises to engage in rent-seeking or innovative behavior. Our findings reveal that regulated enterprises increase both their rent-seeking and innovation efforts in response to environmental regulation. Importantly, enterprises exhibiting lower levels of rent-seeking demonstrate more substantial increases in rent-seeking expenditure when confronting environmental regulation. Furthermore, we discover that state-owned enterprises are more inclined to implement innovative behaviors, while foreign enterprises significantly reduce their innovative activities. This study highlights the complex relationship between environmental regulation and enterprise behavior in developing or transition economies.