Too good to be true: The inverted U-shaped relationship between home-country digitalization and environmental performance

Digitalization has been seen in the past as a panacea as it has been argued that higher digitalization will translate into better environmental performance. As the process of digitalization has advanced, however, some environ-mental drawbacks have been encountered and need to be addressed. We thus explore the inverted U-shaped relationship between home country digitalization and environmental performance. We hypothesize that in the first stage, home country digitalization has a positive impact on environmental performance (e.g., enhanced energy efficiency and resource management), but then it reaches a tipping point at which an excessive level of digitalization causes a "rebound effect," hence increasing the use of resources and resulting in higher pollution. Our panel data of 5015 firms from 47 countries in 10 sectors for the period 2014-2019 confirms our predictions. The panel smooth transition regression model (PSTR) confirms the moderating effect of the level of a country's institutional framework on this relationship between digital transformation and environmental performance. More particularly, our results show that countries with stronger institutional frameworks flatten the inverted U- shaped curve.