Effects of environmental regulation on the upgrading of Chinese manufacturing industry.

Abstract

In recent years, China has constantly strengthened environmental regulation (ER) to force the manufacturing industry to upgrade. This study theoretically analyzes interaction mechanism of ER on the upgrading of manufacturing industry through foreign direct investment (FDI) and technological innovation (TI) and carries out empirical verification by using provincial panel data from 2000 to 2016 in China. The results demonstrate that the current ER intensity in China is unable to directly promote the upgrading of manufacturing industry, while through the interaction effects of FDI and TI do boost the upgrading of the industry. The above mechanisms are also robust even if we take the regional heterogeneity into consideration. Basic education and urbanization are favorable for the upgrading of the manufacturing industry. However, the increase in dependence on foreign trade is not conducive to upgrading manufacturing industry. Chinese government should further strengthen ER and give full play of the interaction mechanism of ER to guide the flow of foreign investment and force enterprises to carry out TI. In the meanwhile, Chinese government also needs to ensure balanced regional development, thus better promoting the upgrading of manufacturing industry.