The mediating role of green innovation on the relation between environmental regulations and firm performance: evidence from European context

Abstract

Purpose The purpose of this study is to explore the impact of environmental regulations on firm performance in high-polluting European industries, with a focus on the mediating role of green innovation. Design/methodology/approach Using data from 80 heavy-polluting companies across 10 European countries from 2010 to 2022, the research distinguishes between “command-and-control” and “voluntary” regulations. Using a random effects model, the authors examine both short- and long-term effects on performance while avoiding endogeneity concerns. Findings The findings reveal that mandatory regulations reduce firm performance in the short term but yield long-term benefits by improving efficiency. Voluntary regulations consistently enhance performance, offering flexibility in adopting sustainability practices. Green innovation mediates the impact of command-and-control regulations on performance only in the long run while positively mediating voluntary regulations across most periods. Practical implications The study provides many insights. For managers of companies, particularly those in high-pollution sectors, adopting green innovation enables them to boost competitiveness. In addition, for investors and stakeholders, this research helps to identify firms with sound sustainable development practices, thereby guiding investment decisions. Originality/value This study provides valuable originality by focusing on both mandatory and voluntary regulatory and fills a gap in the literature. In addition, the research highlights the varying effects of types of regulation, providing insight into the short- and long-term dynamics of the role of green innovation in improving firm performance.

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