Association for Public Policy Analysis & Management

The potential impacts of environmental regulation on enterprise competitiveness have been widely debated. The conventional wisdom is that environmental regulations add costs to enterprises, which weakens competitiveness in international markets. On the other hand, ‘Porter hypothesis’ argues that environmental regulation might enhance competitiveness by providing incentives for environmentally- friendly innovation. China’s rapid development of manufacturing has long been based on high pollution and low level technology, thus it is particularly important to estimate the influence of environmental regulation on enterprises competitiveness in China. Using detailed production data from nearly 75,000 textile enterprise observations from the 2002-2007 China’s Industrial Enterprise Database, we use difference-in-differences (DID) approach to estimate the effects of pollution discharge standard regulation of 2005 on textile enterprises’ total factor productivity (TFP) levels. We find that among surviving enterprises, stricter pollution discharge standard regulation is associated with a roughly 11% decline in TFP. While the impacts show great heterogeneity on different types of enterprises. The more stringent discharge standard has particularly large negative effects on domestic private enterprises (a 15% decline) at 1% significance level, and also show some evidence on state-owned enterprises (a 14% decline) at 10% significance level, but there is no significant impact on foreign enterprises. We divide the sample into sub-industries according to 3-digit Standard Industrial Classification Code (SIC Code), and we find the more stringent discharge standard only has significant impact on enterprises related to dyeing and finishing process, especially for enterprises of wool dyeing and finishing (a 21% decline), but there is no significant impact on textile manufacturing enterprises. Our empirical results imply that, on the whole, environmental regulation has significantly reduced the competitiveness of China’s textile printing and dyeing enterprises. However, the competitiveness of foreign enterprises has not been affected.