Does green corporate investment crowd out other business investment?

Abstract

Empirical studies on the link between green investment and other business investment at the firm level either focus on innovation-specific types of investment or fail to consider the simultaneity of investment decisions. The analysis to be presented here offers a broad focus on different types of environmental protection investment (EPI) and explicitly considers simultaneity issues, using newly created panel data for German manufacturing firms. Germany is an ideal case for testing the crowding-out hypothesis, due to its high level of environmental regulation and a significant presence of command-and-control style measures, which are especially under debate as a source of crowding-out. The estimation of a behavioral investment model supports a crowding-out of other business investment through EPI in general as well as its subcategories of add-on measures and investments in renewable energy, whereby add-on measures bear the greatest potential for a deterioration of productivity.