Does competition from the informal sector affect firms' energy intensity? Evidence from China.

• The informal sector can play a role in sustainable development. • Competition from the informal sector can significantly improve the energy efficiency of formal firms, and this result is robust. • Instrumental variable and property score matching method are used to address possible endogeneity issues. • Innovation has a significant mediating effect. Based on micro-evidence, this paper investigates the role of the informal sector in sustainable development. In particular, this paper examines the impact of competition from the informal sector on the energy intensity of firms based on Chinese manufacturing enterprise data. The results indicate that firms reduce their energy intensity in the face of fiercer competition from the informal sector. Competition from the informal sector has a more obvious effect on reducing energy intensity especially for firms with higher energy intensity. The subsample regression results imply prominent regional and enterprise ownership heterogeneity. The mechanism test indicates that competition from the informal sector reduces firm energy intensity by promoting the product innovation, production cost innovation, R&D (Research and Development) activities of formal firms. However, there is no evidence of a crowding-out effect, that is, competition from the informal sector has not been found to squeeze out firms' output and reduce energy intensity. [ABSTRACT FROM AUTHOR]