Fairweather friends: Why Chinese polluters want more regulation

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In countries where regulatory enforcement is erratic or unpredictable, governments often face a trade-off between stable investment and effective regulation. In China, for instance, firms respond to regulatory uncertainty by cultivating political ties or bribing local officials to protect them from unexpected interventions. These ties mitigate perceived threats to investment, but also obstruct leaders from regulating widespread risks—such as illegal pollution. In a bid to improve pollution and stabilize the investment environment, China’s leaders are striving to make pollution enforcement more predictable. They have clarified standards, strengthened regulatory capacity, and punished local officials who under- (or over-) enforce regulation. Research shows that firms have responded by polluting less, but are they also investing less in response? Do firms see the rise in predictable pollution enforcement as a threat to existing investments (and the protections offered by political ties)? Do firms even distinguish between predictable versus arbitrary enforcement when making investment decisions, or do they consider political ties a sufficient protection against regulation of any sort? Drawing on interviews, original enforcement data, and records on China’s top 10,000 polluting firms, I show that firms actually favour predictable enforcement. Predictable pollution enforcement (such as sanctions conducted in accordance with the law) is associated with increased investment. In contrast, unpredictable enforcement (such as extra-legal closures of polluters) is associated with decreased investment, even when firms are directly protected from these measures. These findings show that longstanding collusive practices need not trap states in a difficult bargain, where stable investment is exchanged for poor regulation.