Too good to be true: The inverted U-shaped relationship between home-country digitalisation and environmental performance

Abstract

The current pandemic era has increased the need for a better understanding of the pros and cons of digital transformation. Digitalisation has been seen in the past as a panacea, as it was argued that higher digitalisation would translate into better environmental performance. As the process of digitalisation advances, however, we realise that it may have some environmental drawbacks that need addressing. We thus explore the inverted U-shaped relationship between home country digitalisation and environmental performance. More particularly, we hypothesise that, in the first stage, home country digitalisation has a positive impact on environmental performance (e.g., enhanced energy efficiency and resource management), but then it reaches a tipping point where an excessive level of digitalisation causes a “rebound effect”, hence increasing the use of resources and resulting in higher pollution. Our panel data of 5,015 firms from 47 countries in 10 sectors for the period 2014-2019 confirms our predictions. The panel smooth transition regression model (PSTR) confirms the moderating effect of a country’s institutional framework level on this relationship between digital transformation and environmental performance. More particularly, our results show that countries with stronger institutional frameworks flatten the inverted U-shaped curve.