Administrative Monopoly Regulation, Greenwashing and ESG Performance: Evidence from China Fair Competition Review System

In the modern economy, companies are increasingly judged not just on how much money they make, but on how they treat the planet and the people around them. This broader measure of success is known as ESG, standing for Environmental, Social, and Governance. It asks whether a factory is polluting the air, whether a corporation treats its workers fairly, and whether its leaders are acting with integrity. For years, many business leaders have treated these goals as a luxury or a burden, fearing that doing the right thing costs too much and hurts their ability to compete. They worry that spending money on green technology or community programs will leave them vulnerable to rivals who cut corners. This tension creates a difficult choice: should a company invest in its future sustainability, or should it focus entirely on immediate survival in a crowded market?

The answer to this question often depends on the rules of the game. If the market is rigged so that some companies get special favors while others struggle, the pressure to compete fairly disappears. In China, a specific type of unfair advantage has long existed, known as administrative monopoly. This happens when local governments use their power to protect local businesses, blocking outside competitors from entering the market or giving local firms special tax breaks and cheap loans. When a company knows it is protected by the government, it has little reason to improve its environmental or social record; it can simply rely on its protected status to survive. However, when that protection is removed, the landscape changes dramatically. A new study explores what happens when a government steps in to break these protections and force companies to compete on a level playing field.

Researchers from several Chinese universities set out to investigate whether removing these government protections actually pushes companies to become more responsible. They focused on a major policy change called the Fair Competition Review System, which began rolling out in 2016. This system was designed to stop government departments from creating rules that unfairly favored local businesses or blocked competition. The researchers treated the introduction of this system as a natural experiment. They compared companies located in regions where local governments had a history of heavy-handed protectionism against companies in regions where the market was already more open. By looking at data from thousands of listed companies over a decade, they could see how the removal of these artificial barriers changed corporate behavior.

The findings were clear and significant. When the government cracked down on administrative monopolies and forced a fairer market, companies in the previously protected regions significantly improved their ESG performance. They did not just get better grades on paper; their actual scores for environmental and social responsibility went up. Perhaps more importantly, the study found that these companies stopped trying to trick the system. In the past, some firms might have claimed to be green or ethical in their public reports while doing very little in reality, a practice known as greenwashing. The data showed that as competition increased, this deceptive behavior dropped. Instead of faking their efforts, companies began to invest in real, substantive improvements to their operations.

The researchers traced exactly why this shift occurred. It turned out that breaking up monopolies restored the genuine pressure of competition. When local governments stopped handing out special subsidies, tax breaks, and easy loans to their favorite local firms, those companies lost their safety net. Suddenly, they had to fight for every customer and every dollar of financing. To survive this new reality, they realized that being a responsible corporate citizen was no longer just a nice idea; it was a strategic necessity. By improving their environmental and social records, they could attract better investors, secure loans from banks that cared about sustainability, and build a reputation that helped them win in the marketplace. The study noted that this effect was strongest in the environmental and social dimensions, suggesting that companies felt the most pressure to fix the issues that the public and regulators could see most clearly.

The impact of this change was not limited to the companies' reputations; it had real economic benefits. The firms that improved their ESG performance after the policy change found that they faced fewer obstacles in getting money to grow their businesses. They also saw their products sell better and their stock values rise. This suggests that the initial cost of doing the right thing was outweighed by the long-term rewards of being a trusted, competitive player in a fair market. The study also highlighted that the effect was most pronounced for state-owned enterprises and companies in industries that were traditionally dominated by a few large players. These were the firms that had relied most heavily on government protection, and they were the ones that had to adapt the most when that protection vanished.

The research also looked at who was watching the companies and how that attention influenced the results. The shift toward better ESG performance was much stronger when banks, investors, and the general public were paying close attention to environmental issues. When local governments themselves prioritized environmental goals, the companies responded more quickly. This indicates that the combination of fair competition and external scrutiny creates a powerful incentive for change. The study did not find that companies were forced to change by a single law, but rather that the removal of unfair advantages made the market itself demand better behavior.

Ultimately, the study offers a compelling look at how government policy can shape corporate character. It shows that when the playing field is leveled, companies do not retreat into silence or deception; they rise to the challenge by becoming more sustainable and responsible. The Fair Competition Review System acted as a catalyst, removing the crutches that allowed inefficient and irresponsible firms to survive. In doing so, it revealed that the drive to compete fairly is a potent force for good, capable of turning the pressure of the market into a genuine commitment to the environment and society. For policymakers and business leaders alike, the message is clear: a fair market does not just produce better prices; it produces better companies.