Abstract

Digitalization has been seen in the past as a panacea as it has been argued that higher digitalization will translate into better environmental performance. As the process of digitalization has advanced, however, some environmental drawbacks have been encountered and need to be addressed. We thus explore the inverted U-shaped relationship between home country digitalization and environmental performance. We hypothesize that in the first stage, home country digitalization has a positive impact on environmental performance (e.g., enhanced energy efficiency and resource management), but then it reaches a tipping point at which an excessive level of digitalization causes a “rebound effect,” hence increasing the use of resources and resulting in higher pollution. Our panel data of 5015 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 the level of a country’s institutional framework 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.