Environmental Regulation Empirical Research On The Impact Of China's Industrial Performance

From the environmental protection movement in the 1970s, while people strengthen environmental regulation to control industrial pollution, they have also given tremendous concerns for the influence of environmental regulation would on economic development, industrial performance, and international competitiveness of industry. Foreign scholars carried on a great deal of theoretical researches and empirical analyses for this. Based on the externality theory, the solution of environmental pollution problem, fundamentally is the comparison between costs and benefits. Only when the social benefits obtains from the environmental regulation is more than the social cost, the environmental regulation means effective. The effective environmental regulation policy should attend the aim of controlling pollution and reducing the adverse effect as far as possible. Then achieved the "win-win" condition of both the environmental protection and the economical growth. As the developing country, China is facing more a severe trade-off between environmental protection and the economical growth, industrial pollution control and industrial performance. However, the related research about the impact of environmental regulation on Chinese industry performance are far from enough. This paper aims at understanding the Chinese industry environmental regulation policy implementation effect, through study this issue, and provide the theory and practical basis for promoting the quality and the level of environmental regulation policy, at same time industry raise the ability of response to environmental regulation.Using the Structure-Conduct-Performance (SCP) paradigm of industrial organization theory, this paper examines the transferring mechanism from environmental regulation to industrial performance. When government implements environmental regulation policy, it will not only change the cost of production, but also lead to the market structure and the market conduct changes. For instance, the condition of entry and the technological innovation behavior. According to the SCP paradigm, the changes of market structure and market conduct, inevitably can have the effect on the industrial performance. Therefore, the influence of environmental regulation on industrial performance, not only includes the direct effect of the cost of production increases which produce to industrial performance, but also covers the indirect influence which environmental regulation through to prevents the entry of new firms and technological innovation, produce to industrial performance. As far as the effect of environmental regulation on the entry of new firms, environmental regulation through enhancement the capital requirements and exerting a stricter standard to the new firm, possibly can become a barrier to entry, thus reduce the market competition level, and cause the industrial profitability enhancement. As far as the effect of environmental regulation on the technological innovation, environmental regulation through demand-pull and technology-push can prompt the technological innovation and take the advantage of this enhance the industrial performance. Therefore, the effects of environmental regulation on industrial performance, are through the transferring mechanism by which the cost of production, the entry of new firms, the technological innovation to industrial performance, not only the direct influence but also the indirect influence. Both of the influences have the positive role and negative effect. Therefore, only through the comprehensive survey for each kind of factors, can we make the correct explanation on the influence of environmental regulation on industrial performance.Using Standard Industrial Classification Index's at the 2-digit level panel data of China, this paper makes empirical studies on the effect of environmental regulation on entry of new firms, technological innovation, industrial performance during the years 1996-2004. The major findings includes:1) Environmental regulation haven't become a barrier to entry, on the contrary, it has induced the new enterprise to enter, this may cause the industry profitability descend. The empirical results demonstrate that Environmental Regulation Intensity (ERI) enhances 1%, the number of entry of new firms increase 0.04%. One reason is that although the Chinese industry pollution control investment enjoys continuously increases, the absolute quantities of these funds were still low, thus has not had tremendous influence on enterprise's capital requirements. The other is that although China has implemented the stricter environmental regulation to some more polluted industries, but from the Chinese overall industry condition, environmental regulation standard is insufficient strict to prevent the entry of new firms. On the contrary, it has induced the entry of new firms, thus has caused the firms which in the industry increased. The increase of firms in the industry, inevitably causes the degree of competition in the industry intensified, thus possibly made the industrial profitability drop.2) Environmental regulation can stimulate the industrial technological innovation, indirectly enhance the industrial performance, thus can through the innovation compensation. The empirical results demonstrate that stricter environmental regulations are related to increased patent applications, if the environment regulations intensity are enhancingl%, the patent applications with lag 2 issue increase 0.24%. Porter Hypothesis has been verified in the certain degree. Nevertheless the effects of environmental regulation policy on R&D expenditure were not obviously found.3) The positive effect which environmental regulation through promoting technological innovation has on industrial performance, is insufficient to completely counteract the negative effect which environmental regulation through raising production costs and inducing entry of new firms, therefore, the final influence that environmental regulation has on industrial performance are the negative. With environmental regulation policy implementation, it causes the industrial pollution abatement costs and expenditures rise, this has directly made the production cost rise and industrial performance drop; Environmental regulation, through attracting the new enterprise to enter, has caused the industrial profitability drop; at the same time, through stimulating the industrial technological innovation, it made the industrial performance to enhance. But the positive effect which environmental regulation through promoting technological innovation has on industrial performance is very small, it is insufficient to completely counteract the negative effect which environmental regulation through raising production costs and inducing entry of new firms, therefore, the final influence result is the negative. The empirical results shows that ERI rise 1%, Ratio of Total Assets to Industrial Output drop 0.08%, Overall Labor Productivity drop 0.05%.Therefore, we suggest four main measures to be taken to improve the quality of Chinese environmental regulation policy: Firstly, suitably enhances the environmental regulations standard and the intensity so that further promote the industrial technological innovation; Secondly, while enhancing the environmental regulation's intensity, choose the regulation make full use of the flexibility and cost-effective of market-based instrument, reduces the policy instruments which can stimulate the technological innovation at most degree; Thirdly, adverse effect which environmental regulation on industrial performance; Finally, the regulated industry should adopt the positive rules, including implement clean production, develop ecology industry and circulation economy, in order to reduces the negative effect which environmental regulations on the industrial performance, then achieve the pollution control and the industrial performance "win-win "condition target.