Environmental Stringency and Firms’ Participation in Global Value Chains : Evidence for MENA Countries

Overview & Synopsis

The Middle East and North Africa (MENA) region stands among the most vulnerable areas to the impacts of climate change. At the same time, with lax environmental regulations, this region’s integration into Global Value Chains (GVC) is modest. Thus, this paper aims to examine the effect of environmental stringency on GVC participation in MENA countries. To do so, using the World Bank Enterprise Surveys, this paper analyzes how environmental regulations and treaties affect both the extensive and the intensive margins of GVCs. The main results show that national environmental regulations increase the likelihood of integrating into GVCs when it is measured using both the simple and the strict definitions. This result highlights the role of such regulations in attracting GVCs in developing countries and thus lends support to the Porter Hypothesis. The paper also shows that these regulations increase the effect of spending on research and development on GVC. Yet, the results are less conclusive for the role of environmental treaties. These results remain robust when a mixed multilevel approach is used, and when large exporters, who might lobby to affect policy choices, are dropped from the analysis. In addition, at the sectoral level, national regulations are associated with higher GVC participation in the food sector in the MENA region and lower participation in the plastics one. Finally, regulatory stringency increases the probability of GVC participation for both SMEs and large firms, with the effect generally stronger for SMEs.