Theoretical Analysis of Environmental Regulation and Enterprise Behavior

Abstract

From a traditional point of view, we are caught in the dilemma of eco-protection and economic development. Enterprises see environment protection as a confinement to their economic activities as it hinders freedom of production and reaction and generates extra cost to meet environmental regulations, thus compromising profitability and competitiveness. However, according to Michael Porter, it is unwise for enterprises to raise environmental standards and new regulations on environment. A rational set of environmental regulations could stimulate innovation, which would improve resource utilization and make up for increased initial cost caused by environmental regulations, thus ensuring competitiveness. Therefore, what is the mechanism of environmental regulations working on enterprise behavior? A decent understanding and appropriate handling of the relationship between environmental regulations would not only highlight Chinese enterprises in globalization but also play an active role in promoting sustainable social and economic development. The paper started with an introduction of environmental regulations from its definition, classification, and channels, followed by descriptions of enterprise behaviors. Then the paper discussed the impact of environmental regulation on enterprise behaviors, including maximizing profits, technical innovation, and competitive behaviors. The production and cost function of enterprises related to environmental factors were used to establish the measurement model of enterprises' technological innovation. In the last part, this paper proposed measures and suggestions for improving social and economic effects of enterprises.