Relocate or Innovate? The Impact of Environmental Regulation Stringency on Pollution-Intensive Firms in China

46 Pages Posted: 22 May 2020

See all articles by Yizhe Dong

Yizhe Dong

University of Edinburgh Business School

Wenxuan Hou

University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Liang Xi

University of Edinburgh - Edinburgh Business School

Tianju Wang

University of Edinburgh Business School

Date Written: March 31, 2020

Abstract

This paper assesses the impact of environmental regulation stringency on the relocation of pollution-intensive firms in China. Pollution haven hypothesis (Porter theory) suggests that firms would (not) choose to relocate (but to innovate). We proxy the regulation stringency with multidimensional institutional capacity and construct an index by using the entropy method and find that stringency reduces the number and growth rate of pollution-intensive firms in highly regulated regions, especially these in heavy industries. An important channel for stringent regulations to hold back firm creation is the increased financing cost. Stringent regulations are not found to promote technology innovation presumably because relocation is less costly. Overall, the results support pollution haven hypothesis.

Keywords: China, environmental regulation, financial cost, pollution-intensive firms, regulation stringency

JEL Classification: G30; K32; Q50; Q58

Suggested Citation

Dong, Yizhe and Hou, Wenxuan and Xi, Liang and Wang, Tianju, Relocate or Innovate? The Impact of Environmental Regulation Stringency on Pollution-Intensive Firms in China (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=3586564 or http://dx.doi.org/10.2139/ssrn.3586564

Yizhe Dong (Contact Author)

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Wenxuan Hou

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

Liang Xi

University of Edinburgh - Edinburgh Business School

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Tianju Wang

University of Edinburgh Business School ( email )

Edinburgh
United Kingdom
07410115152 (Phone)

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