How Does Environmental Regulation Affect the Location of New Polluting Firms? Exploring the Agglomeration Threshold of Effective Environmental Regulation.

Abstract

Some scholars have already proved the important role of agglomeration in studying how environmental regulation (ER) affects the location of polluting firms. However, further research is needed on both the mechanism and the empirical evidence. This paper reports the construction of a location database of new chemical plants in China’s Yangtze River Economic Belt (YREB), where a fixed-effects panel threshold regression model was used to explore the agglomeration threshold of effective ER. We found a single agglomeration threshold for the whole YREB region that represented the turning point of ER from excluding to attracting new chemical enterprises. Additionally, there were two agglomeration thresholds in the lower reaches. If agglomeration reached the lower threshold, the effect of ER changed from repulsion to nonsignificant attraction. Once above the upper threshold, the attraction effect became large and significant. The results for this region were consistent with the Porter hypothesis. Furthermore, there was a single agglomeration threshold in the middle reaches. When agglomeration level exceeded the threshold, the repellant effect of ER was no longer significant. In the upper reaches, we found no valid threshold and ER always exhibited a small and nonsignificant exclusion effect. The pollution haven hypothesis was more explanatory in the middle and upper reaches. In the end, some suggestions are provided to support the government to formulate differentiated environmental policies.