How Does Environmental Protection Law Affect Industrial Upgrading of Chinese Firms: The Mediating Role of Technological Innovation?

In the context of addressing environmental pollution and promoting sustainable development, it is necessary to evaluate the impact of environmental regulations on Chinese firm’s industrial upgrading. Treating the environmental protection law (EPL) as a quasi-natural experiment, the current study investigated the effects of EPL on industrial upgrading, measured in the form of total factor productivity (TFP) of Chinese firms. Based on the data from 2008-2020 of 247 firms from polluting industries and 1929 firms from other industries listed on the Shanghai and Shenzhen stock exchanges, the firm-level TFP was calculated using the Levinsohn-Petrin (LP) method. To evaluate the effect of EPL on the TFP, a difference-in-differences (DID) method was then adopted. The results show that the new environmental protection law of China has a positive and significant effect on firm-level industrial upgrading in China. Empirical evidence also shows that technological innovation measured in the form of total patents could mediate the nexus between EPL and firms’ TFP. Furthermore, the regional heterogeneity and replacing the dependent and mediating variables in the main model also supported the empirical findings. Based on the derived results, conclusions including policy suggestions are implicated in the enforcement of environmental regulations in the future, and the current study also provides China’s micro-firm level evidence for the Porter hypothesis.