Can Environmental Regulation Enhance Productivity? Evidence from China’s Industrial Sector

Abstract:

We study how an environmental regulation implemented in China in the late 1990s impacted firm productivity, finding that productivity increased by 5% on average for regulated firms in less pollution-intensive industries, while remaining stable for those in more pollution-intensive industries relative to unregulated firms. Productivity gains are driven by a combination of market selection (i.e., firm exit), reallocation, and intra-firm technology and production process upgrading. Creative destruction dynamics are concentrated among privately owned firms rather than state-owned enterprises.