Government regulation, business leaders’ motivations and environmental performance of SMEs

This paper investigates whether government regulation crowds out intrinsic motivation to improve environmental performance of small- and medium-sized enterprises (SMEs). Motivation crowding is the phenomenon by which external pressures reduce intrinsic motivation. Literature on motivation crowding effects of environmental regulations exhibits two gaps. First, previous studies have focused on households while neglecting business organizations, even though businesses account for a major part of industrial pollution worldwide. Second, previous literature neither measured intrinsic motivation nor tested how government regulation affects this motivation. Empirical evidence of motivation crowding by environmental regulations is therefore still lacking. This paper fills both research gaps. Using a dataset of 2,373 SMEs from 12 European countries, we show that government regulation enhances environmental performance directly but harms it indirectly by crowding out intrinsic and extrinsic motivations of business leaders. It only stimulates environmental performance for companies exhibiting low motivation.