The impact of formal and informal institutions on corporate environmental investment: Evidence from China

Abstract

Research background: China’s rapid economic growth has been accompanied by increasingly severe environmental pollution. As critical market entities, corporations are often major sources of pollution from production and operational activities. To enhance environmental protection, China must rely on the dual regulatory forces of formal and informal institutions.

Purpose of the article: This study analyzes the impact of formal and informal institutions on corporate environmental investment (CEI). We also explore the mechanisms and heterogeneity of this impact.

Methods: We investigate the impact of formal and informal institutions on CEI using the panel fixed effects model with panel data from Chinese A-share market listed companies between 2010 and 2023.

Findings & value added: Our findings reveal that formal and informal institutions significantly promote corporations’ strengthened environmental protection. Notably, formal institutions primarily affect non-state-owned enterprises, and those in high-pollution industries, high-carbon-emissions regions, and the western region, while informal institutions primarily affect others. We also demonstrate that this positive impact operates by promoting corporate green innovation and reducing transaction costs. This study highlights the complex relationship between institutions and corporate environmental practices in developing or transitional economies.

Keywords

formal institutions, informal institutions, corporate environmental investment, environmental protection

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