Going green or going away: Environmental regulation, economic geography and firms’ strategies in China’s pollution-intensive industries

Abstract

The high-growth, resource- and pollution-intensive industrialization model that China has pursued has caused severe environmental pollution and deterioration, particularly in a number of clusters in the coastal regions of East and Southeast China, where the Reform and Opening-up policies first started. The lack of uptake of environmental norms/values, deficit of regulatory enforcement of environmental policies, and insufficient institutional capacity have been compounding factors. As environmental standards were raised by China’s central government, the enforcement of environmental regulation has been compromised more in inland China than in coastal regions, due to China’s “decentralized governance structure” and regional disparity in terms of both economic development and environmental pollution. This paper therefore argues that rising environmental regulations, as well as firm characteristics, regional hub effect and political environment, have all been particularly important in forcing China’s pollution-intensive enterprises to restructure their production, through innovation, upgrading, geographical relocation, outsourcing and plant closure, especially in China’s coastal regions. It contributes to recent studies by developing a heuristic analytical framework that aims to be sensitive to the impacts of environmental regulation, political environment and regional hub effect over firm restructuring, but which does so by stressing these impacts are simultaneously inflected by the nature and attributes of firms. The empirical analysis suggests a roughly inverted “U”-shaped relationship between firm relocation tendency and firm size (or firm capability), resulting from complex interactions between political environment, regional hub effect and environmental regulation.