The impact of inspection on the sustainable production strategy : environmental violation and abatement in emerging markets

Abstract

Environmental inspections help regulators ensure manufacturers’ compliance with environmental regulations and reduce pollution. However, the intensive inspections to ensure compliance are costly. This is especially problematic for emerging countries with limited resources for law enforcement. The literature provides limited understandings for regulators to design a cost-effective inspection program. Our study enters this discourse by examining the relationship between governments’ environmental inspection frequency (effort) and manufacturers’ environmental performance (in terms of environmental incidents). First, by sampling Chinese-listed manufacturers, our empirical analysis reveals that higher inspection frequency improves a manufacturer's environmental performance in the short but not the long term. We further develop a dynamic game model to explore the reasons behind this lack of effectiveness in the long term. The results show that effectiveness can be achieved through an integration between inspection frequency and penalties for noncompliance. Inspection leads to cosmetic improvements in a manufacturer frequent inspections accompanied with increased penalties substantially enhance a manufacturer's abatement efforts, which is the most effective enforcement policy. Our study suggests that penalty can be the boundary condition between rational choice and behavioral shock on environmental enforcement. It urges manufacturers to make reasonable abatement efforts to reduce environmental penalties and improve environmental performance. Our study has important implications for policymakers in that it provides them a basis on which to review the current environmental law and enforcement process.