The effect of environmental regulation on capacity utilization in China's manufacturing industry.

Abstract

How environmental regulations are used to improve manufacturing capacity is crucial to the future development of China's manufacturing industry from a quality point of view. This paper adopts a dynamic spatial panel model to empirically analyze both the effects of different types of environmental regulation policies on capacity utilization in China's manufacturing industry and their mechanisms. The results show that China's manufacturing capacity utilization varies a great deal, with improvements in technical efficiency playing the main role, although with significant regional differences. Both command-and-control and market-incentive environmental regulation are conducive to improvements in manufacturing capacity utilization; market-incentive environmental regulation, however, plays the stronger role. The above mechanisms have certain differences though. Both types of environmental regulations are able to improve manufacturing capacity utilization by improving technical efficiency and equipment utilization but the command-and-control policy tool exerts a greater effect in improving technical efficiency while the market-incentive mechanism has a greater effect in improving equipment utilization.