専修大学社会科学研究所 月報

No.6512017年 9 月

doi.org/10.34360/00009086

The Effect of Environmental Regulation on
Technological Advancement: Based on Empirical Analysis ofChinese Provincial Panel Data
Sun Wenyuan 1(Nanjing Audit University)
Xu Yirui 2(Senshu University)

Abstract: This paper is an empirical study of the effect of environmental regulation upon
technological advancement based on the panel data collected from 30 provinces,
municipalities and autonomous regions in mainland China from 2000 to 2010. The results
show that on a national basis environmental regulation has a positive effect upon technologicaladvancement , but there lies regional disparity between the east, middle and west of China:
The effect is positive in the east while negative in the middle and west. This paper further
proves the effect of environmental regulation upon technological progress follows an inverted“N”-shaped curve and then puts forward some policy suggestions.
Key Words: environmental regulation, technological progress, panel analysis

1This paper is supported by the National Natural Science Foundation “Influence of environmental regulation on
Employment: Theory, Empirical research and Countermeasures (71573136)”,National Social Science Foundation“ acomparative study of the wealth gap and income gap at home and abroad (15BJL018)”, Jiangsu Education Science
12th Five-Year project “The impact of the expansion of Higher Education on income distribution: Analysis based on
different groups’ perspectives (D/2015/01/117) ”.
Sun Wenyuan (1970-): male, born in Xinghua, Jiangsu Province, PhD. of Economics, is now a professor of School of
Economy and Trade, Nanjing Audit University, dedicated to the studies of international trade theories and policies.
2
Xu Yirui (1978-): male, born in Shanghai, PhD. of Economics, is now a associate professor of Faculty of
Economics.

－ 1 －The Effect of Environmental Regulation on Technological Advancement:
Based on Empirical Analysis of Chinese Provincial Panel Data
1. Introduction
Recent years, with the rapid increase of its GDP, China has developed into the second largest world
economy. Yet along with its economic growth is increasing energy consumption and deteriorating
environment. Local governments are faced with the dilemma between clean environment and GDP
growth due to the fact that the latter, to a large extent, is achieved through extensive growth pattern
featuring high energy consumption and high investment and is unsustainable in nature as it is bound tobring about the results of high emissions, environmental deterioration and resource waste. In 2013,
China’s energy consumption totaled to 3.79 billion tons of coal, up 3.9% over that of 2012. Under suchcircumstances, environmental regulation is a must choice.
Traditional views hold that environmental regulation will have a negative impact upon enterprises,
resulting in more operation cost and slower economic growth, while revisionists believe environmental
regulation will help promote technological advancement and sustainable development of enterprises.
Many scholars have conducted empirical studies related to this and generally come to two opinions:
The first opinion is that environmental regulation stimulates technological advancement. Typical ofsuch a positive opinion is Porter (1991). Porter concludes from his studies that proper environmental
regulation measures will not only help improve social welfare, but motivate enterprises to increase
research and development input and implement technological innovation so as to adopt cleaner
production and develop cleaner products, upgrade production technologies or even develop new
production pattern or products to meet the requirement of environmental regulation policies. Later,
Porter and Linde (1995), based on their studies on the factors that influence the supply and demand oftechnological innovation, prove through cases that strict environmental regulations are quite likely tostimulate innovative activities of enterprises. This is the very source of the famous “Porter Hypothesis”.
Afterwards scholars have tried to explore into the hypothesis, delving into the mechanisms by which
environmental regulation might affect technological innovation and empirical studies concerned.
Lnajuow and Mody (1996), based on the data of patent inventions in USA, Japan and Germany from1972 to 1986, studied the relationship between environmental regulation and technological invention
across industries. The results show that higher waste disposal costs leads to more patent inventions.
Mohr (2002) introduced external scale economy indexes to his study and assumed the new productive
capital produces fewer pollutant emissions than the old one, and found that environmental regulation
will help improve productivity as well as reduce pollution. Brunnermeirer and Cohen (2003) conducted
an empirical study on the relationship between the number of environmental protection patents appliedand environmental regulation and found that there exists a statistically significant positive correlation
between the two. The empirical studies of Horbach (2008) based on the data of German enterprises andof Murty and Kumar (2003) based on panel data of Indian enterprises suggest that environmental
regulation exerts a clearly positive effect upon technological progress in environmental protection－ 2 －industries.
The second opinion argues that environmental regulation has little or even a negative effect upon
technological advancement. Environmental regulation is purposed at rectifying “market malfunction”,
internalizing negative externalities into production costs. This kind of analysis is always based on static
standards, that is, to analyze the effect of environmental regulation upon enterprise costs and profits on
the hypothesis that technology, resource allocation and consumption demand of enterprises are notchangeable (Cropper, Gates, 1992). In the frame of such static models, environmental regulation is sure
to result in rising costs of enterprises, hence a negative effect upon technological progress as rising costs
mean reduced investment in technological innovation. Gray and Shadbegian (1995), based on the data of
259 American enterprises from 1979 to 1990, studied the relationship between environmental regulation
measures and total factor productivity of enterprises and found that the rising costs in pollution treatment
leads to lower productivity. This remains a common trend among the three industries covered in the
study though the effect may function in different degree due to the enforcement of those environmental
regulation measures at different standards. An earlier survey targeted at five industries that are labeledwith serious pollution in USA concerning manufacturing of paper, chemical products, stone and glass,steel, and non-ferrous metal, comes to the same conclusion (Barbara and <connell, 1990). Jaffe andPalmer (1007), by using total expenses on research and development and total number of patents
successfully applied as indexes for technological innovation, and pollution treatment cost as the index
for environmental regulation, explored the relationship between environmental regulation andtechnological innovation based on the interval data of American manufacturing industry from 1975 to1991 and found no significantly positive correlation between the number of patents and environmental
regulation.
Scholars at home are concerned about this issue too. Xu Qingrui et al. (1995)conducted a study basedon interviews with over 50 enterprises in Jiangsu and Zhejiang provinces and found that governmental
policies and laws are the primary stimulus for enterprises to scheme technological innovation that helps
improve external environment, while public opinion and other economic means such as pollution
treatment charges are not so inducing. This fully demonstrates environmental regulation has a positiveeffect upon technological innovation. The studies of Zhang Qizi et al. (2006) concluded that thecorrelation between environmental protection and technological innovation policies in China needs to be
improved. Huang Dechun and Liu Zhibiao (2006) conducted a case study of Hai’er Group and suggested
that proper environmental regulation contributes to environmental improvement and technologicalinnovation of enterprises. Wang Junhao and Li Yunyan (2009), through a questionaire-based survey of
78 textile enterprises in Zhejiang Province, classified enterprises into “active” and “defensive” groups interms of strategies they adopted to cope with environmental regulation and found that compared with thelatter, the former group of enterprises are more inclined toward technological innovation activities likedeveloping green processing technology or green products. Zhao Hong (2008), based on the panel dataof China’s industrial enterprises from 1996 to 2004 , analyzed the effect of environmental regulation
upon research and development investment and authorized patents and pointed out that environmental
regulation, to certain extent, enhances technological innovation of Chinese enterprises. The study of－ 3 －Jiang Ke (2009) shows that environmental regulation stimulates technological innovation competence ofenterprises, yet there lies regional disparity: the stimulating effect is significant in the east while not somuch in the middle-west and northeast of China.
Besides, some scholars have studied the relationship between environmental regulation andtechnological progress by analyzing the effect of environmental regulation upon enterprise productivity.
Zhang Cheng et al. (2011), based on China’s provincial panel data from 1998 to 2007, constructed amathematical model to analyze the relations between environmental regulation and production
technology advancement. The results reveal that the relationship between environmental regulation andtechnological progress in China’s eastern and middle areas follows a “U”-shaped curve, but that in thewest is no clear yet. Li Ling and Tao Feng (2012) examined the relationship between environmental
regulation and green total factor productivity based on a panel model. Their study labeled manufacturing
enterprises with serious pollution, medium pollution and light pollution according to the severity ofpollution they may produce and found that for enterprises labeled with serious pollution, the relationshipbetween environmental regulation and green total factor productivity, technological progress andtechnological efficiency agrees with an inverted “U”-shaped curve, but for the rest two kinds ofenterprises, the above-mentioned relationship follows a “U”-shaped curve.
It can be concluded that scholars both home and abroad have achieved much in studying therelationship between environmental regulation and technological progress, both theoretically andempirically. However, for one thing, most of these studies choose enterprises from developed countries
as the sample. For another, there is no consensus on the conclusion; indeed, many conclusions are drawnthat may vary between nations, regions and even industries. Therefore, it is of great need to further study
the relationship between environmental regulation and technological advancement in China. This paper
is to study the effect of environmental regulation upon technological advancement based on data
covering China’s 30 provinces, municipalities and autonomous regions from 2000 to 2010.
This paper intends to address the following questions: Will environmental regulation stimulatetechnological advancement? Considering huge differences between regions and between urban and rural
areas and different paces of marketization in China’s east, middle and west, will the effect show regional
disparity too? This paper is structured as follows: first, it presents a literature review of previous studies
to analyze how environmental regulation would work on technological progress. Then it conducts anempirical analysis both on a national and regional basis of the data collected from China’s 30 provinces,
municipalities and autonomous regions concerning environmental regulation and technologicaladvancement with a view to reveal the effect of environmental regulation upon technological progress in
China. Finally there comes the conclusion as well as policy suggestions. The following part of the paper
includes analysis of mechanisms by which environmental regulation may enhance technologicalprogress in Part Two, formulation of measurement model, results and explanations in Part Three,verification of effect models of environmental regulation upon technological advancement in Part Fourand conclusion and policy significance in Part Five.

－ 4 －2. Mechanisms by Which Environmental Regulation Enhances Technological Advancement
Generally speaking, technological advancement is attributed to its inherent development, need of
economic development and market demand, and incentive measures adopted by the government as well.
A nation will always encourage technological innovation and advancement through supportive or
regulatory measures. The supportive measures include funding public research and development
institutions and granting research and development subsidies, etc., while regulatory measures mean thegovernment establishes norms and standards through taxation and social contract, etc. to directtechnological advancement of enterprises. Enterprises respond to governmental regulations and benefit
from gradual innovation in product and production process and the spreading of such technologies.
Environmental regulation may enhance technological innovation through the following mechanisms.
2.1 Signal mechanism of reducing investment uncertainty
Environmental regulation enables enterprises to recognize the negative effect of resource utilization
upon environment and “forces” them to realize the prospect of economic gains that can be obtained fromenvironmental improvement. Meanwhile it frames technological advancement scheme for enterprises sothat they need not worry about the possible risks of technological innovation. Environmental regulation
policies are always featured by rigidity, predictability and flexibility. Related studies prove that all thesethree features have a significantly positive effect upon technological innovation, in particular the featureof unpredictability. Unpredictability is more effective than rigidity in that the latter is only part ofenvironmental policies while the former can induce investment activities of enterprises (including risk
investment) (Johnstone et al, 2010).
Where environmental regulation policies are actively implemented, both enterprises and consumers
will have enhanced awareness of developing or consuming green products. As a result, there will benotably more “green” products sold in the market. Green or organic food counters appear in the
supermarket, and the advertising brochures emphasize that consumption of such products produce noharm to environment as well as human body. As environmental regulation becomes increasingly strict,enterprises extend the concept of developing green products from environment-friendly qualities of theend product to green production, green disposal and the like, yearning for developing products which arecost-saving in production, environment-friendly in use, and easy to be disposed of and ready forrecycling after use.
2.2 Prohibitive regulation and cost pressure mechanism
Under environmental regulation, environmental cost is included in the production process ofenterprises. That means production cost rises and hence “cost pressure” is generated. In order to reduce
cost, enterprises would have to go in for technological innovation. Environment taxation would guide
enterprises toward resource reallocation. For example, enterprises would be encouraged to reduceenergy consumption and emission if higher taxes are levied on industries that are traditionallyacknowledged for heavy pollution and high emission, and the ratio of taxes in energy pricing system is－ 5 －adjusted. Besides, enterprises would be encouraged to invest more money in environmental protection
projects if more favorable taxation rules regarding utilization of renewable energies and tax returnmatching policies are introduced to integrate taxation with utilization, and punishment withencouragement.
Upon the enforcement of a prohibitive regulation, enterprises would have two choices: either to
upgrade technologies or withdraw from the market. What most enterprises would probably choose istechnological innovation in conformity with the regulation. For example, lead will do great harm tojoints and liver if kept long in human body. In 1974 the American government issued Clean Air Act,requiring related enterprises to reduce lead content in petrol and provide consumers with non-lead petrol
to choose. This law has been a great impetus to the upgrading of catalyst material used for car ignition 3.
2.3 Mechanism of environmental regulation enhancing industrial structure optimization
Under environmental regulation, those enterprises featuring heavy pollution and poor competitivenessand not being able to meet certain environmental standards would be excluded, while new enterprises
would have difficulty in entering because of high environmental standards. This helps retain those large
and highly competitive enterprises that are moderately numbered and with stable business in theindustries and markets concerned. This also helps maintain within certain industries a relatively highlevel of market concentration which facilitates scale production and technological innovation targeted atbetter competitiveness. In other words, environmental regulation would enhance industrial concentrationand hence industrial upgrading. Under environmental regulation, modern industrial system would have agreener structure, which is characterized by closing down outdated production facilities, attachingimportance to energy saving and emission reduction of traditional industries and upgrading the wholeindustrial chain. Synder et al. (2003) proved that America’s environmental regulation policies
concerning chlorine production have resulted in a dramatic change in chlorine users’ need of the productand hence closing down of those enterprises failing to renew production technologies. Environmental
regulation has helped enterprises using new chlorine production technologies win more market shareand promote the application of technologies of high efficiency.
2.4 Subsidy-based incentive mechanism
Due to the fact that technology is a kind of public product, research and development activities of
production knowledge and technologies will inevitably be confronted with such problems as market
malfunction and investment deficiency. Accordingly, developing countries would solve such external
problems by means of taxation exemption, research subsidies and public polices, etc. It is said in theReport of the Eighteenth Congress of CPC that, in the face of tighter resource constraints, worsening
environmental pollution and degrading ecosystem,

ecological civilization construction must be

highlighted to be an integral part of economic, political, cultural and social construction. It is also said in
the report that it is necessary to deepen reforms on resource-based product pricing and taxation systems,
Qiu Zhaoyi, On the Effect of International Vertical Specialization upon China’s Environment, Economic Science
Press, 2013.
3

－ 6 －

establish resource paid-use and ecological compensation policies that reflect market supply and demandand scarcity degree of resources as well as ecological value and inter-generation compensation. Thisrequires the government to use such means of favorable taxation policies and subsidies to encourage
enterprise to go in for technology renewing. The government subsidies contribute to the enhancement ofresearch and development and self-dependent innovation of enterprises. The government’s incentive
mechanism of granting subsidies for research and development activities will help motivate enterprises
to invest more in such activities and be self-dependent in technological innovation.
3. Empirical Models and Test
3.1 The Choice and Formulation of Empirical Models
Related economic theories tell that technological progress is an economic phenomenon or, indeed, an
output. Its production process is the one that produces new knowledge based on labor, capital andregulations. The production function of technological innovation can be expressed as follows:tech  Af ( k , l , z )(1)

In Formula (1), A stands for institutional factors; tech for technological advancement-based output inthe course of technological innovation; L for labor input in the course of technological innovation whichin this paper mainly refers to input of technical personnel (human); k for capital input in the course oftechnological innovation which in this paper involves two aspects, foreign direct investment (fdi) andresearch and development input (rnd); and z for other factors that may affect technological innovation in
the course which, in this paper, mainly include environmental regulation level (envir) and degree of
economic opening across China (trade) and technology spillover due to opening up, typically in the formof foreign trade. Accordingly, this paper constructs a more general production function as shown below:
tech  Af ( f d ,ir n d, e n v ,i hr u m a, tnr a d, m
e a r k )e t

(2)

Based on Formula (2), this paper establishes a test model similar to that of Amiti & Wei (2004) toanalyze factors that influence technological advancement:t e ci,h  2r n id,t  3 f di,it   4h u m at  i,t （3）t  c  1e n vi,it ri,t n 5t r a di,t e 6m a r ki,te 

tech here refers to technological advancement index of each province; the variable subscript i todifferent province (municipality); subscript t to year; and a and c to parameters to be estimated.
3.2 Variable Explanation and data source
Variable Explanation
Technological advancement (TECH). The course of technological advancement is the very sameprocess in which enterprises develop proprietary core technologies and realize value increment of the
new products. It is a complicated question how to measure technological advancement. A variety ofmethods have been mentioned in related literature. Quite a few studies chose patent output as a proxy－ 7 －variable for technological progress (涂红星，肖序 2014). Considering that in reality many technologicaladvancements are micro-innovations which may not be converted to patents, some other studies used
total factor productivity as the proxy variable of technological advancement (黄凌云 吴维琼，2013).
Denoting “production efficiency within certain period of time”, total factor productivity is virtually anindirect index that requires calculation. In view of the easy accessibility of provincial data, we chose theindex of energy consumption per GDP in China’s provinces, municipalities and autonomous regions toevaluate technological advancement. This seems to be more reasonable than using patent number toevaluate technological advancement for technological progress does not necessarily correspond to patentacquisition in real life. Sometimes it may only be a tiny advance in production process, but this can also
be reflected in energy consumption per GDP. Therefore, this paper chooses energy consumption per
GDP to indicate technological advancement .
Environmental regulation level (ENVIR). Due to the large variety of environmental regulation tools
and the data concerning intensity of each tool are not so accessible and of low quality, previous scholars,
based on different research objectives, have measured environmental regulation from the following
perspectives: environmental regulation policies, ratio between pollution treatment input and the total
Table 1: Effect of Environmental Regulation on Technological Advancement
Variable
Tech

Envir

FDI

Variable Name

Variable Explanation

Data Source

technological advancement

Measured by energy consumption per China Energy StatisticalGDP, expressed as ln(1+tech) in the Yearbook,model
China Statistical Yearbook

environmental regulation

Measured by the ratio between theamount of industrial wastewater
discharged in the area and the total
amount of industrial wastewater
discharged, expressed as ln(1+env)
in the model

foreign direct investment

Measured by the ratio between
foreign direct investment and GDP of China Statistical Yearbook andthe area, expressed as ln(1+fdi) in the local statistical yearbooks
model

China Environment Statistical
Yearbook,
Local statistical yearbooks

R&D

Measured by the ratio between
research and development expenses
research and development input
and GDP of the area, expressed asln(1+rnd) in the model

China Science and Technology
Statistical Yearbook and local
statistical yearbooks

Human

Human capital

Measured by the proportion of
population with junior college
education and above, expressed asln(1+human) in the model

China Statistical Yearbook andlocal statistical yearbooks

Trade

International trade

Measured by the ratio between
foreign trade volume and GDP of thearea, expressed as ln(1+trade) in the
model

China Statistical Yearbook andlocal statistical yearbooks

Marketmarket mechanism

Measured by the ratio of private
economy, expressed as ln(1+market)
in the model

China Statistical Yearbook andlocal statistical yearbooks－ 8 －input or production value of enterprises, costs for operating pollution treatment facilities, per capita
income, frequency of environmental regulation institutions inspecting and monitoring pollution
treatment of enterprises, changes in pollutant emission amount under environmental regulation (张成等2014). This paper measures environmental regulation level by the index of industrial wastewater
discharge standards, that is, the ratio between the amount of industrial wastewater discharged in the area
and the total amount of industrial wastewater discharged.
Control variables. The ratio of research and development expenses (R&D): measured by the ratio
between research and development expenses and GDP of that area; Trade openness (TRADE): measured
by the ratio between import and export trade volume and GDP of that area. Human capital (Human):measured by the proportion of population with junior college education and above. Marketization degree(MARKET): measured by the ratio of private economy.
A natural logarithm has been chosen for all the above-mentioned variables when estimation is made.
Accordingly, estimated coefficient ahead of the variable can also be deemed as an elastic coefficient.
Please see Table 1 for details of these variables.
In empirical analysis, we group provinces, municipalities and autonomous regions in mainland China
into east, middle and west areas, among which the east areas include the 12 provinces (municipalities
and autonomous regions) of Liaoning, Beijing, Hebei, Tianjin, shandong, Jiangsu, Shanghai, Fujian,Zhejiang, Guangdong, Guongxi and Hainan; the middle areas include the 10 provinces (municipalities
and autonomous regions) of Inner Mongolia, Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei,
Hunan; and the west areas include the 10 provinces (municipalities and autonomous regions) of Sichuan,
Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang and Chongqing. Due tounavailable data, Tibet is excluded in this paper. That means this study covers 30 provinces,
municipalities and autonomous regions. And the time span was from 2000 to 2010.
3.3 Analysis of test results
Based on the theoretical analysis of the mechanisms through which environmental regulationinfluences technological advancement, we make a regression analysis by introducing energy
consumption per GDP as the explanatory variable. Due to the fact that this study mainly analyzes theeffect of environmental regulation upon technological progress in 30 provinces of mainland China, wechoose the panel data model featuring fixed effect for analysis. The empirical analysis is conducted on
the basis of national panel data and provincial panel data respectively.
Table 2 shows the results of empirical analysis based on national panel data. When making theanalysis by gradually adding to it other control variables, we find that the effect of environmental
regulation upon technological progress is statistically positive. This finding means: for one thing,environmental regulation does have a positive effect on technological innovation of China as a whole;
for another, the regression result is relatively stable. Take Model 4 as an example. The influence
coefficient of environmental regulation upon technological advancement is estimated to be 0.601,
suggesting that whenever environmental regulation level is up 1%, technological progress will rise
0.601%. It can be concluded that taking the country as a whole, environmental regulation, to certain－ 9 －degree, leads to technological improvement of China.
Our analyses of control variables indicate that more R&D input will help enhance technologicaladvancement; the regression coefficient of human capital suggests that, to certain extent, it can promotetechnological advancement; foreign trade and FDI have a positive effect upon technologicalimprovement, showing that its opening-up has contributed to technological advancement of China. This
does not agree with the conclusion of Zhang Zhongyuan and Zhao Guoqing (2012) which suggests
spillover effect of FDI hindered technological progress.
In Model 4, we also examined the combined effect of environmental regulation and marketization
degree and found that environmental regulation would help with technological advancement throughmarket mechanism.
Table 2: The Effect of Environmental Regulation upon Technological Advancement:
An Analysis on a National Basis (2000-2010)
Model 1Model 2Model 3Model 4C

3.104***(0.421)2.144**(0.633)4.015*(1.116)

5.157(1.306)Envir

0.635**(0.498)0.633*(0.393)0.719***(0.322)0.601**(0.361)FDI

0.539**(0.472)

0.692***(0.394)

0.553**(0.495)

R&D

0.491**(0.409)0.347***(0.384)0.262**(0.493)

Human

0.021**(0.501)0.039***(0.264)0.028**(0.381)Trade

0.056**(0.374)0.092**(0.518)Market

0.066*(0.416)0.023*(0.337)
0.093*(0.347)

Envir *Market
AR2

0.513

0.487

0.662

0.649

F

145.61***120.51***109.38***141.47***

DW stat

1.387

1.401

1.657

1.588

obs

330

330

330

330

Note: Statistical software is Eviews60. . *，**，*** respectively mean being significant below the significancelevel of 10% , 5% and 1%; in the brackets is the standard deviation value (The same with Table 3).

Viewing the huge disparity between the east and west of China in terms of economic development,
environmental management and marketization, the effect of environmental regulation upon
technological advancement may vary from area to area. What follows is the regression analysis of theeast, middle and west areas to analyze the possible differences among different regions.
Table 3 is the regression analysis of the classified areas based on panel data. Estimated results provethat there exists regional disparity when it comes to the effect of environmental regulation upon
－ 10 －

technological advancement. To detail it, environmental regulation in the east has lead to its technologicalimprovement, while environmental regulation in the middle and west of China has restricted theirtechnological advancement. One possible reason may be due to the differences between the east and the
middle and west in terms of economic structure and development. Another possible reason is that inthose economically developed areas, market mechanism works better so that environmental regulation
will function better to guide technology advancement, hence a more conspicuous effect.
Table 3: The Effect of Environmental Regulation upon Technological Advancement:
an Analysis on a Regional Basis (2000-2010)
East

MiddleWest

Model 5Model 6

Model 7

Model 8Model 9Model 10C

8.185***(0.448)6.547**(0.569)4.254*(1.099)7.137(1.876)

5.214***(0.461)

6.223**(0.572)

Envir

0.813**(0.373)0.753*(0.462)-0.013***(0.117)-0.017***(0.3284)-0.015***(0.282)-0.012*(0.421)FDI

0.604**(0.422)

0.553**(0.499)0.366*(0.228)0.573**(0.316)0.497***(0.321)0.356**(0.473)R&D

0.403**(0.486)

0.372**(0.399)0.326***(0.226)0.312**(0.372)0.288***(0.298)0.215**(0.449)Human

0.015**(0.477)0.027**(0.468)0.039***(0.321)0.019**(0.236)0.009***(0.471)0.008**(0.377)Trade

0.023*(0.478)0.027**(0.419)0.025***(0.291)0.018**(0.448)0.006***(0.442)0.002**(0.477)

Market0.003*(0.428)0.005*(0.463)0.001*(0.301)0.007**(0.411)0.006***(0.432)0.003**(0.499)0.502*(0.169)Envir *Market-0.014*(0.333)-0.009*(0.465)

AR2

0.595

0.628

0.672

0.791

0.683

0.816

F

74.27***

88.31***

102.52***117.77***89.47***

93.57***

DW stat

1.632

1.257

1.331

1.502

1.419

1.602

obs

132

132

99

99

99

99

4. Type Test of the Effect of Environmental Regulation upon Technological Advancement
In our study we intend to analyze some kind of non-linear relationship between environmental
regulation and technological advancement. This is similar to the study of Tu Hongxing and Xiao Xu(2014) which demonstrated that the relationship between environmental regulation and self-dependent
innovation follows a “U’-shaped curve, resembling the Environmental Kuznets Curve. In order to test
whether there is a similar relationship between environmental regulation and technological improvement,
and how the former works on the latter, we constructed the following model.
23t e ci,ht    1e n vi ,it r  2e n vi ,it r  3e n vi ,it r   i,t（2）

Formula (2) is used to test the type of the effect of environmental regulation upon technological－ 11 －

advancement. If the estimated result is β1>0，β2<0 且 β3>0, it means the curve is a N-shaped one; or if
β1<0，β2>0 且 β3<0, then the curve is an inverted N-shaped one.
Table 4: The Type of the Effect of Environmental Regulation upon
Technological Advancement
Model 11
Fixed EffectRandom EffectC

2.017*(1.322)

1.96(1.285)envir-0.57*(0.704)-0.42**(0.671)envir21.22*(0.699)1.35**(0．409)envir3-0.74*(0.572)-0.81**(0.391)

AR2

0.67

0.71

F

144.72***102.51*

DW stat1.547

Hausman test value(P value)
Observations

1.375
14.532(0.1377)

330

330

In Table 4 are listed the regression analysis results based on the panel data concerning the effect ofenvironmental regulation on technological advancement. Both fixed effect and random effect results are
given. The empirical analysis results suggest that Hausman test denies random effect model and favors
fixed effect model. Therefore, we adopted fixed effect model to explain empirical results.
The estimated result based on Model 11 as shown in Table 4 suggests that β1<0，β2>0 andβ3<0, and it
passes the statistic significance test. This means the estimated result attests to the inverted N-shaped
curve hypothesis. Then it can be concluded that the effect of environmental regulation on technologicaladvancement accords with the inverted N-shaped curve hypothesis; that is, with the enhancement ofenvironmental regulation, its positive effect upon technological advancement will increase first anddecrease later. Based on analyses mentioned above, this means taking China as a whole, its
environmental regulation efforts have promoted its technological advancement, yet there lies regional
disparity when it comes to the effect of environmental regulation upon technological advancement on
different parts of the country: the effect is positive in the east while negative in the middle and west of
China.
It can be approximated that the effect model of China’s environmental regulation upon its
technological advancement stays at Part II in the inverted N-shaped curve. That is to say, excluding
other factors, China’s technological advancement would continue favorably as environmental regulationis enhanced, yet when reaching certain point, the latter will restrict the process of the former.

－ 12 －

5. Conclusion and Policy Suggestions
We conducted an empirical test on the effect of environmental regulation on technologicaladvancement in inland China based on the panel data of China’s 30 provinces, municipalities andautonomous regions from 2000 to 2010.
Results show that environmental regulation tends to have a positive effect upon technologicalimprovement; in the short term, the effect functions at an accelerating speed, while in the long run, theeffect will change from a positive into a negative one. Analyses on a regional basis tell that there exists
regional disparity when it comes to the effect of environmental regulation upon technologicaladvancement, which can be detailed as: environmental regulation contributes to technological progressin the east of China but incumbers the latter in the middle and west of China.
The effect of environmental regulation upon technological advancement follows an inverted“N”-shaped curve and China, as a whole, is now at Part II of the curve. On a regional basis, the east of
China reaches Part II, while the middle and west are still in the declining channel of Part I. Thus, fromthe perspective of technological improvement, it is necessary to recognize regional differences
concerning the effect of environmental regulation upon technological advancement when environmental
regulation policies are implemented across China. Environmental regulation has become an importantfactor to learn about China’s GDP growth and technological advancement.
The policy significance of this study lies in:Environmental regulation is a “double-edge sword”, which can stimulate technological advancementon the one hand and hamper it on the other. In the long term, a win-win development of China’s
economy and environmental civilization can only be made possible

when we balance economic

development and environmental protection. Of course, a good environmental regulation measure might
be regarded as the best if it can both help with environmental improvement and with technologicalupgrading and development of enterprises.
Environment is a public good and government, enterprises and citizens all need a clean environment.
Environmental pollution is a “harmful” public good which features strong negative externality and may
result in market malfunction, thus requiring governmental regulation. Faced with the deteriorating
environment, the government should adopt necessary environmental regulation measures. For example,
due to environmental regulation, the energy consumption per 10,000 yuan GDP in 2013 totaled 0.737
tons of coal, down 3.7% over that of 2012. This is the outcome of harmonious interaction between
environmental regulation and economic development and meantime that of technological progress.
Environmental regulation should ideally have the features of: 1) severity so as to reduce to the fullest
extent pollutant discharge; 2) stability so as to provide enterprises scheming technological innovation
with necessary planning time for their risk investment; 3) flexibility which enables enterprises to
identify the effective innovation plan; 4)clarity so as to avert possible vain efforts; and 5) continuity, thatis, the policy could help with the on-going innovation of environmental technology (Johnson et al.
2010).

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