Environmental Regulations as Industrial Policy: Evidence from the Global Automotive Industry

Abstract

Can environmental regulations also enhance local industrial performance, overachieving their primary goal of protecting the environment? This potential link has been discussed in the literature, focusing on efficient use of resources for production, increased supply of energy-efficient infrastructure, and promoted innovations in the green technology sector. Another potential channel, which is highly plausible in the context of developing countries but largely neglected in the literature, is encouraged learning and technological catch-up in the existence of appropriate environmental regulations. In this paper, I examine this understudied dimension, focusing on the global automotive industry. The preliminary results show that estimated β in Equation 1 is positive and statistically significant at the 5% level. In other words, those countries which are main global auto producers and whose local automotive sector is dominated by foreign multinationals tend to show a higher chance of implementing relatively strict vehicle emission standards comparable to EURO4 or higher. This result suggests that the primary aims of such regulations may go beyond purely environmental motivations, given that local air quality and income levels are controlled for. The Granger test results show that the null (H_0: θ_1=⋯=θ_(t-1)=0) is rejected at the 5% level, meaning that implementation of emission standards is at least a partial contributor to strengthened local vehicle production and the sector’s international exports. The sign of the parameter with the first-order time lag is positive and significant at the 5% level, suggesting that the direction of the contribution is positive. These industry-promotion effects are found to be clearer and stronger in those countries which have relatively large local vehicle markets and host sizable FDI, supporting my second hypothesis.