Could Environmental Regulation Improve Firms’ Competitiveness?

For many years, the economic growth has been accomplished on the cost of environment deterioration. However, when we try to recover the desirable environment, is it unavoidable to sacrifice the economic growth? In the micro-level, will the productivity of firms be improved by implementing or strengthening environmental regulation? In other words, could environmental regulation improve firms’competitiveness? It is exciting that many researches have proved that such regulations can make firms more competitive. Therefore, based on the previous papers, we analyze this problem theoretically and empirically.On one hand, this article explores Melitz’s heterogeneous firm model to identify the relationship between environmental regulation and firm competitiveness. On the other hand, we test our three hypotheses in two ways:first, we use province level data and firm level data to test the covariance between environmental regulation and firm competitiveness; second we identify the causal relationship using a difference-in-difference model. Meanwhile, we take into account the institutional influence in the empirical part, and we find the difference between De facto environmental regulation and De jure environmental regulation, caused by promotion incentives.The most important empirical results indicate that, while other conditions are the same, environmental regulation can improve firms’competitiveness significantly. What is more, De facto environmental regulation has better effect than De jure environmental regulation. Thus, in order to get a double-benefit from environmental quality and firm competitiveness, local government should conduct more strict environmental regulations, among which ensuring efficient implementation is imperative.