Unintended Innovation Consequences of Skirting the Environmental Regulation: Evidence from the Food Processing Industry in China

Abstract This paper uses China’s 2016 Pollutant Discharge Permits System (PDPS) to evaluate its impact on innovation in the food processing industry. We begin by exploring the entry and exit decisions of food processing firms. The findings suggest that stricter environmental enforcement following the PDPS leads to decreased local firm entry but increased neighboring firm entry, indicating that new firms tend to locate in neighboring regions with less stringent regulations. Building upon this pattern, we argue that the PDPS’s positive impact on firm innovation is primarily driven by increased industry agglomeration – a dynamic directly stimulated by heterogeneous regulatory pressures.