How does environmental regulation influence enterprises’ total factor productivity? A quasi-natural experiment based on China’s new environmental protection law

Abstract

With the growing tightening constraints of ecological environment, managing the relationship between environmental protection and economic growth has become a vital issue. This study considered China’s new environmental protection law (NEPL) as a quasi-natural experiment to evaluate the impact of environmental regulations on enterprises’ total factor productivity (TFP) in a difference in differences (DID) framework and further analyzed the internal impact mechanisms. The heterogenous impacts of enterprises with different characteristics at enterprise, industrial, and regional levels are investigated. The results revealed that the NEPL significantly hinders enterprises’ TFP and the effects persist for two years. Further, the inhibition on enterprises’ TFP mainly results from tightening financial constraints and negative impacts on technical innovation and resource allocation efficiency. When considering the heterogeneity at enterprise, industrial, and regional levels, state-owned and export enterprises and enterprises with longer establishment times and better cash flow situations are less affected by the implementation of the NEPL. Furthermore, high market competitiveness and government efficiency are conducive to easing the NEPL’s negative impacts. The results demonstrate that the “win-win” goal between environmental protection and economic growth has not been achieved under the unified standards and severe sanctions. Therefore, it is vital to accelerate market-oriented reform of China’s environmental regulations. This study is a reexamination of Porter Hypothesis and fills the gap in the existing literature on the NEPL’s micro influence framework on enterprises’ TFP.