This article evaluates the impact of environmental compliance on firms' innovation and financial performance using a panel dataset of Chinese firms for the period of 2000-5. Our results show certification of the ISO 14000 has a significantly positive impact on firms' profitability. This finding is robust when we take into account possible endogeneity of certification, effects of export and types of customers, and possible precertification time trends. In addition, we find that certified firms have larger per-worker sales volumes and market shares in the country, which suggests an alternative mechanism for the Porter hypothesis in the context of a developing economy.
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