How Environmental Regulation Promotes Industrial Structure Upgrading – An empirical study based on the mediating effect method

doi:10.21203/rs.3.rs-4319223/v1

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How Environmental Regulation Promotes Industrial Structure Upgrading – An empirical study based on the mediating effect method

https://doi.org/10.21203/rs.3.rs-4319223/v1

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To overcome the problems of environmental pollution and energy shortage that have accumulated in the extensive economic growth model, the Chinese government is seeking to optimize the industrial structure by strengthening environmental regulations. However, how environmental regulations promote industrial structure upgrading has not yet been carefully explained. Therefore, this study empirically tests the influence of environmental regulation on industrial structure upgrading using mediating models. The results show that environmental regulation can stimulate industrial structure upgrading, not only directly but also through the mediating effects of technological innovation and global value chain embeddedness. Moreover, the effect of environmental regulation on industrial structure upgrading shows regional heterogeneity. Therefore, we propose promoting regional industrial structure upgrading through the following methods: constructing an inclusive environmental regulation system, improving scientific and technological innovation, exploring a flexible and free system of opening-up, and accelerating the construction of the domestic demand system.

Environmental regulation

Industrial structure upgrading

Technological innovation

Global value chain embeddedness

Mediating effect model

Since its reform and opening-up, China has made remarkable achievements in its economic and social development. From 1978 to 2020, China's gross domestic product (GDP) increased from 367.87 billion yuan to 1008782.5 billion yuan. As China's economy moves from a stage of high-speed growth to a stage of high-quality development, the traditional economic vitality released by the demographic and resource dividends will gradually disappear, and the marginal contribution of factor input to economic growth will approach its limit. In light of this, optimizing the industrial structure and activating the internal driving force of economic growth have become key methods in promoting the quality and efficiency of the national economy in the new era. In China, for a long time, the extensive economic growth mode, which is characterized by “high energy consumption, high pollution, and high emissions,” has aggravated the problems of environmental pollution and energy shortage, and inhibited the sustainable growth of regional economies and societies (Pei et al., 2019; Wang et al., 2020). The China Energy Statistical Yearbook shows that from 2009 to 2020, the total amount of energy consumed by the country increased from 3.21 billion tons to 4.98 billion tons of standard coal, and the amount of carbon emissions increased from 7.36 billion tons to 10.03 billion tons. According to the Bulletin on the State of the Ecological Environment of China, from 2010 to 2020, the proportion of prefecture-level cities with healthy air quality standards decreased from 81.7–59.9%, and the proportion of monitoring points with extremely poor shallow groundwater quality increased from 16.8–43.6%. The core of solving environmental problems is correctly handling the relationship between environmental protection and economic growth (Sarkodie and Strezov, 2018; Zhang and Duan, 2020). Considering that energy and environmental factors are the rigid constraints of economic growth, most governments are increasingly emphasizing the concept of green development, thereby promoting environmental regulatory reforms, adjusting the price mechanism of resource factors, and promoting the production factors from low added-value, low-efficiency, and high-consumption industrial chains to high added-value, high-efficiency, and low-consumption industry chains (Feng et al., 2021; Yang et al., 2020). Changing the industrial structure is a complex and systematic social process that is influenced by many factors, such as market demand, factor endowment, capital flow, technological innovation, and institutional reform by the government (Konzelmann et al., 2018; Yu and Wang, 2021). It is worth thinking about the kind of role that environmental regulation plays in the process of industrial structure upgrading. It is also important to consider the mechanism of influence that environmental regulation uses to promote the organic integration of social and economic factors (represented by labor, capital, and technology), and natural ecological elements (represented by air, water, minerals, and organisms).

The rest of the content in this paper is structured as follows: Section 2 introduces a comprehensive literature review on the relationship between environmental regulation and industrial structure upgrading. Section 3 explains the influence mechanism and research hypotheses. Section 4 describes the study's materials and methods, including model construction, variable description, data source, and descriptive statistics of the key variables. Section 5 presents the empirical analysis, and, finally, Section 6 presents the conclusions and policy implications of this study.

In the process of economic development, due to various problems, such as institutional inertia, technical risks, and rent-seeking corruption, more time and money are required to promote changes in the industrial structure by simply relying on the market mechanism. An important role of modern government is to guide market players in optimizing resource allocation, and adjusting the production structure through good institutional arrangements to better develop high-value industries (Konisky, 2007; Richards et al., 2000). Based on the “Porter Hypothesis” and “Pollution Haven Hypothesis,” numerous scholars have shown that environmental regulation can change regional industrial structure by influencing the regional competition, industrial distribution, and structure of import and export trades (Leeuwena and Mohnen, 2017; Poulsen et al., 2021; Singhania and Saini, 2021). Lorena (2015) reviewed 52 empirical studies that were closely related to the Porter Hypothesis and deduced that strict environmental regulation would increase the competitive advantage of multinational enterprises; therefore, small-medium firms that lack technological capabilities are more likely to move to countries with lax environmental regulations. In other words, environmental regulations promote the survival of the fittest in the domestic market. Franckx (2015) believed that environmental regulation could affect the market competitiveness of export commodities. For example, automobile exporting countries usually implement more stringent domestic policies, because strict environmental standards may bring “first-mover advantages” to leading countries. Martı́nez-Zarzoso et al. (2017) investigated the relationship between environmental regulation and intra-European Union trade flows, and found that environmental stringency can significantly affect the trade patterns of imports and exports between countries. In other words, stricter environmental regulations can enhance the distribution of high-quality goods, services, and technology. Zhang et al. (2018) investigated the effect of environmental regulation on the technological innovative behavior of 298 manufacturing firms, and found that environmental regulation could enhance green technological innovative behavior. Muhammad and Khan (2019) assessed the panel data of 115 countries in Asia to confirm that tightened environmental regulations can induce high-quality foreign direct investment (FDI) inflows, and drive the development of new energy and technology-intensive industries. Shehabi (2020) argued that promoting the energy subsidy reform of oil exporters could optimize the efficiency of resource allocation, thereby promoting the diversification of regional economic structures and avoiding the emergence of Dutch disease. Zang et al. (2020) utilized the propensity score matching and difference in differences (PSM-DID) method to examine the effects of the emission trading scheme (ETS) on national industrial structure upgrading among the members of the European Union. They found that the implementation of ETS could promote the upgrading of the country’s industrial structure.

Under the global value chain (GVC) system, various economic entities tend to allocate resources in a well-performing institutional environment, and reconstruct the economic geography of international trade to maximize their own interests. Existing research shows that environmental regulation can affect the regional industrial layout by influencing the behavior of the main participants in economic activities (such as enterprise technological innovation, site selection, and investment intentions). It also changes the industrial structure by influencing the fields and rules of these activities (including the industrial structure, trade scale, and market competition), which suggests many advantages of this study. However, while academic researchers have mainly considered the direct effect of environmental regulation on industrial structure, only a few studies have looked into the ways in which environmental regulation indirectly promotes industrial structure upgrading. To determine the key point of the industrial effect of environmental regulation policy, and leverage the transformation of the regional industrial structure, it is necessary to determine the influence mechanism of environmental regulation on the transformation of the industrial structure. The innovation of this research is in studying the influence mechanism of environmental regulation on industrial structure upgrading, and in analyzing both the direct and indirect effects of environmental regulation on industrial structure upgrading, using mediating effect method.

Industrial structure is usually defined as the composition of industries. The advanced development of industrial structures is affected by many factors, such as resource prices, consumer preferences, production technology changes, macroeconomic systems, and government policies. Generally, the constraints set by environmental regulation, in terms of factor price, technical standards, safety boundaries, and ownership of resources, influence or reshape the industrial structure of a country or region by influencing the behavioral decisions of manufacturers and consumers. This section will investigate the influence mechanism of environmental regulation on industrial structure upgrading, as shown in Figure 1.

3.1. Direct Effect of Environmental Regulation on Industrial Structure Upgrading

When economists add environmental factors to the economic growth function, humans move from a world with infinite output to a world with limited output, and the restrictive factors of production spread from social capital to natural capital (Daly, 1996). The advanced development of industrial structure includes two aspects: the improvement of the production efficiency of enterprises, and the upgrading of the industrial chain. The improvement in the production efficiency of enterprises directly reflects the growth in output per unit of input. Upgrading of the industrial chain is reflected in the process in which production factors continue to flow from industries with high pollution, high energy consumption, and low added value to industries with low pollution, low energy consumption, and high added value. Therefore, the contribution rate of high-end industries to national economic growth would continue to increase. For resource-intensive industries, the implementation of environmental regulation policies changes the relative prices of resource factor costs. To reduce the environmental cost as much as possible, and maintain and improve the market profit margin, manufacturers may purchase energy-saving and emission-reducing equipment; innovate new production technology; accelerate the inter-temporal optimization of resource allocation; improve the efficiency of the input and output of factors, or transfer production; reduce the output of resource-dependent products; and introduce more capital into low-carbon industries with less resource input and high social capital return (Ouyang et al., 2020; Wang et al. 2022). For technology-intensive industries, the implementation of environmental regulation policies can break the balance of interest in the existing market and increase market investment opportunities. The profit-seeking nature of capital will push the capital that was squeezed out by resource-intensive industries into emerging industries, such as the electronic information, artificial intelligence, biotechnology, and aerospace industries. In other words, environmental regulation policies bring environmental factors into the growth function by endowing the resources and environment with appropriate market prices. Moreover, the effects of technology change and factor substitution caused by environmental regulation policies will lead to the reintegration of input factors, production techniques, and institutional structure within the production system. Notably, the production efficiency of various industries within the economy, and the contribution rate of each industry to economic growth will also change accordingly. Based on this, we propose Hypothesis 1 as follows:

Hypothesis 1: Environmental regulation can significantly affect the level of industrial structure upgrading.

3.2. Mediating Effect of Technological Innovation

Since the Industrial Revolution, the economic development practices in developed countries have shown that the large-scale application of various advanced technological innovations, based on the rapid progress of scientific knowledge, is the key to these countries maintaining a high growth rate. Technological innovation is the fundamental driving force for the transformation of industrial structures, and the upgrading of industrial structures is essentially the process of technological progress and innovation. By changing the combination of production factors and conditions in traditional industrial sectors, technological innovation causes changes in industrial growth patterns and structures (Ling et al., 2022; Zhao et al., 2022). On one hand, technological innovation will break the equilibrium state of the traditional factor market, production factors will be concentrated in industries with rapidly increasing returns due to technological innovation, and industries with backward production techniques will gradually degenerate into marginal industries. On the other hand, the new materials and products brought about by technological innovation will cause changes in the structure of production and consumer demand. The inherent relationships among the emerging industries will result in multiplier and diffusion effects, and subsequently promote the diversification and advancement of industrial structures. At present, countries worldwide are trying to reshape their economic structures and promote high-quality economic development through technological innovation. Many studies have shown that the level of technological innovation is closely related to the level of environmental regulation (Murphy and Gouldson, 2000; Porter and Linde, 1995). Environmental regulatory policies can affect decision making, leading to profit maximization. They can do this by influencing the cost of production factors, encouraging enterprises to increase investments in innovation, developing new products and technologies, improving industrial production efficiency, reducing resource consumption and pollutant emissions in economic activities, and helping enterprises to gain first-mover advantage in market competition. At the same time, tightening environmental regulations can induce enterprises with high pollution and high consumption to cluster together in areas where environmental compliance costs are relatively low. Furthermore, to reduce transportation costs, the upstream and downstream industries related to these resource-intensive enterprises will also gather around them. Thus, the agglomeration of different industries in a geographical space can induce “technology spill-over” effects, form economies of scale, and promote the overall progress of production technology and production efficiency in the industry; correspondingly, the industrial structure will also develop. Based on this information, we propose Hypothesis 2 as follows:

Hypothesis 2: Environmental regulation can affect industrial structure upgrading through the mediator variable of technological innovation.

3.3. Mediating Effect of Global Value Chain Embeddedness

In the process of economic globalization, multinational companies decouple their production processes into several stages, and disperse them to different countries and regions to make full use of the advantages of the technology, factor endowment, and factor price available in different places. Multinational companies organize and execute independent production activities in different regions, and assemble a dynamic process of creating value. At the same time, the global value chain (GVC) covers the entire process, from product design conception to final interaction (Fujita and Thisse, 2013). With the advantages of strong capital, advanced technology, and well-known brands, developed countries dominate the high value-added links, such as brand operation, research and development (R&D) design, and marketing, in the development of the GVC. In contrast, developing countries primarily take advantage of cheap labor and natural resources to undertake low-end and low-profit links, such as supplying raw materials, processing, and product assembly, which are usually transferred from developed countries (Gereffi and Lee, 2016). According to the general smile curve theory, higher value-added production links are closer to the two ends of the GVC, whereas lower value-added production links with lower entry barriers are in the middle of the curve (Aggarwal, 2017). The embedded position is a key factor in determining a country’s status in the international division of labor. To solve the “low-end locked” problem in the GVC, developing countries need to change the competitive advantage of traditional factor endowments. Tightened environmental regulation policies can influence the relative price of resource factors and trigger a change in competitive advantage. In the past, to avoid the increase in production costs caused by environmental regulations, multinational companies would transfer resource-intensive industries to areas with lower environmental standards, which would cause changes in the production structure of various countries. In other words, as an important institutional arrangement, environmental regulation policies provide a strong constraint for the reconstruction of the GVC. These policies force developing countries to abandon their traditional factor endowment advantages, learn advanced technology from abroad, constantly break through their own technical bottlenecks, aim at high-end industrial chains, and undertake a greater division of labor in high value-added industries. Based on this, we propose Hypothesis 3 as follows:

Hypothesis 3: Environmental regulation can affect industrial structure upgrading through the mediator variable of global value chain embeddedness.

4.1. Model Construction

The influence mechanism of environmental regulation on industrial structure upgrading shows that environmental regulation can not only promote the advancement of industrial structure directly, but also affect the upgrading of industrial structure through the transmission path of technological innovation and global value chain embeddedness. To verify whether these two factors act as mediator variables, this study constructed mediating effect models to comprehensively inspect the influence mechanism of how environmental regulation promotes industrial structure upgrading.

First, to investigate the direct effect of environmental regulation on industrial structure upgrading, we set up the following econometric model to empirically test Hypothesis 1:

lnISU_it = a₀+a₁lnERI_i,t+a₂lnX_i,t + η_i + τ_t + ε_i,t (1)

where environmental regulation (ERI) is the core independent variable, the upgrading level of the industrial structure (ISU) is the dependent variable, and X represents a series of control variables affecting the development of industrial structure, including the degree of trade openness (TRO), marketization level (MAI), and regional economic development level (ECD). η and τ represent regional and time (year) fixed effects, respectively, which control the influences of unobservable factors of region and time on the advanced development of the regional industrial structure. ε is the residual term; subscripts i and t represent the individual and year, respectively; a₀ is the constant term; and a₁ and a₂ correspond to the coefficient terms of the regression variables.

To further explore how environmental regulation promotes industrial structure upgrading, this study introduces the mediator variables of technology innovation (TEI) and global value chain embeddedness (VCE), and constructs the following mediating effect model to test Hypotheses 2 and 3:

lnTEI_it = b₀+b₁lnERI_i,t + η_i + τ_t + ε_i,t (2)

lnVCE_it = c₀+c₁lnERI_i,t + η_i + τ_t + ε_i,t (3)

lnISU_it = d₀+d₁lnERI_i,t+d₂lnX_i,t+d₃lnTEI_i,t + η_i + τ_t + ε_i,t (4)

lnISU_it = e₀+e₁lnERI_i,t+e₂lnX_i,t +e₃lnVCE_i,t + η_i + τ_t + ε_i,t (5)

4.2. Variable Description

4.2.1. Explained variable: industrial structure upgrading

The free flow and redistribution of labor, land, capital, and other production factors among industries induce changes in the industrial structure. The advanced development of the industrial structure is a process in which production factors flow from industries with low marginal returns to those with high marginal returns. At present, academia has not yet formed a consistent measurement standard for the upgrading level of industrial structure. Recent studies prefer to use the respective percentages of output value, employment, and growth rate of the three major industries, or build a comprehensive index system to calculate the upgrading level of industrial structures (Tang et al., 2020). Considering that the advanced development of China's industrial structure is mainly manifested in the relative changes in the economic status of the three major industries (especially the rising proportion of the tertiary industry with respect to the GDP), based on the research methods of Cheng et al. (2018) and Chen and Zhao (2019), our study used the following formula to calculate the level of industrial structure upgrading:

ISU = ∑(S_j ×j) = S₁×1 + S₂×2 + S₃×3

where S_j represents the proportion of the added value of industry j to the entire GDP. The value of the ISU ranges from 1 to 3. The closer the index value of ISU is to 1, the lower the level of industrial structure upgrading, whereas the closer it is to 3, the higher the level of industrial structure upgrading.

4.2.2. Core explanatory variable: environmental regulation

Regulation refers to the intervention of government departments in the activities of market microeconomic entities to correct or improve market failure under a market-oriented economic system. In the field of resource utilization and environmental protection, market failures, such as external effects, public property resources, non-competitive markets, unclear property rights, and incomplete information, are widespread and cause the non-convexity of production and consumption. It is necessary for the government to implement environmental regulation policies to regulate the relationship between supply and demand, enhance the distribution of benefits, promote social welfare, and impact the behavior of stakeholders (prompting their decision to tend to the optimal threshold to ensure the sustainability of resources and the environment) (Taylor et al., 2019). There are many types of environmental regulation policies. However, in the context of the market economy, to make full use of the dominant function of market mechanisms in resource allocation, the Chinese government has increasingly emphasized the use of market signals, especially the levy of environmental taxes and fees, to guide the market players’ behavior toward resource utilization and environmental protection. Based on this, to express the intensity of environmental regulation (ERI), our study used the ratio of the amount of local sewage charges paid to the national treasury, to the number of enterprises that paid sewage charges.

4.2.3. Mediating variables

(1) Level of technological innovation

Most of the major economic revolutions in the history of human development are driven by technological revolution, and technological innovation is regarded as an important driving force of modern economic growth. By introducing patents for new technological inventions into the economic production system, technological innovation promotes the optimization and integration of labor, land, capital, and other production factors, and influences and reshapes the production and consumption behavior of human beings. At present, to measure the level of technological innovation, most scholars either use input indicators (such as research funds and the number of techno-innovators) or employ output indicators (such as the sales revenue of new products or the number of invention patents). Technological innovation is a long-term and continuous activity. Compared to the current innovation output index, the intensity of innovation investment demonstrates the inherent potential and long-term benefits of regional technological innovation. Our study measured the level of technological innovation (TEI) using the investment intensity of R&D funding (i.e., the ratio of regional R&D expenditure to the regional GDP). The larger the value of this index, the more attention the local government attaches to technological innovation, which can drive a continuous increase in the level of technological innovation among enterprises.

(2) Degree of global value chain embeddedness

The global value chain (GVC) is a global cross-enterprise network that connects a series of links, such as product development, production, sales, services, and recycling, with the aim of improving the value of products or services. The GVC depicts production division and spatial distribution on a global scale. Multinational enterprises allocate various production links globally, while countries embed themselves into the GVC according to their own comparative advantages. In the early stage of globalization, developing countries mainly embedded low-technology industries and industries with low added value, with their advantage being factor costs. As time passes, to avoid being replaced by developing economies with cheaper labor and richer factor endowment in the low-end sector, factors such as competition incentives, windows of opportunity, and an entrepreneurial spirit will drive developing countries to use the internal knowledge flow of the GVC to achieve technology upgrades and improve their embedded position (Dey et al., 2019). Drawing on existing research, our study used the unit scale of FDI to measure the degree of global value chain embeddedness (VCE). The scale of FDI units is measured by the ratio of the amount of FDI actually used in each region (ten thousand RMB) to the number of foreign-invested enterprises registered in each region at the end of the year. A larger scale of foreign investment units indicates that the economy can either maintain or improve its existing comparative advantage; therefore, the degree of global value chain embeddedness (VCE) is better. In addition, the profit-seeking nature of capital encourages the flow of capital from sunset industries to emerging industries. If the unit scale of foreign investment is larger, it indicates that the proportion of emerging industries in the region is higher, and more emerging industries will drive the region to climb from the low-end link of the global value chain to the middle- and high-end links.

4.2.4. Control variables

After reviewing the related literature, it was decided that our study would add three control variables, which may affect the advanced development of industrial structure, into the econometric model. The degree of trade openness (TRO) is expressed as the ratio of the total import and export trades of foreign-invested enterprises to the GDP. The degree of trade openness shows trade exchanges among countries. International trade influences commodity structure through the supply and demand of import and export goods, and changes in the commodity structure affect the adjustment of the industrial structure. The level of marketization (MAI) is expressed by the marketization index of each region. Furthermore, the level of marketization affects the scale and speed of the flow of different resource elements among various industrial sectors that could influence the allocation efficiency of production factors, thus affecting the upgrading of the industrial structure. The level of regional economic development (ECD) was expressed in terms of per capita GDP. An increase in the regional economic development level can lead to an increase in residents’ income levels. The increase in residents’ income can then promote a change in consumption structure, and the change in consumption structure can force manufacturers to adjust their production structure, thereby promoting the upgrading of regional industrial structure.

4.3. Data Source

In this study, 30 provincial administrative regions in China were selected as the research samples (note that the index data for Tibet is missing, and it was eliminated in the quantitative analysis), and a total of 300 data samples were obtained; the study period was from 2009 to 2018. The original data for calculating the upgrading level of industrial structure (ISU), level of technology innovation (TEI), degree of global value chain embeddedness (VCE), degree of trade openness (TRO), and regional economic development level (ECD) indicators in the econometric model were collected from the “China Statistical Yearbook (2008–2019).” The original data required to calculate the intensity of environmental regulation (ERI) were collected from the “China Environmental Yearbook (2008–2019),” and the data of marketization index (MAI) was derived from the “China Marketization Index.” Missing data were supplemented using the trend extrapolation method.

4.4. Descriptive Statistics and Correlation Analysis

Using the Stata 13.0 software, this study conducted a descriptive statistical analysis of the main variables, the results for which are shown in Table 1. Among them, the standard deviation of environmental regulation intensity (ERI), degree of global value chain embeddedness (VCE), and level of regional economic development (ECD) were relatively large, whereas the standard deviation of the upgrading level of industrial structure (ISU) and the degree of trade openness (TRO) were relatively small.

Table 1

Descriptive statistical analysis of the main variables
Variable	Observed value	Mean value	Standard deviation	Minimum value	Maximum value
ISU (Level of the industrial structure upgrading)	300	2.343983	0.1287147	2.127	2.806
ERI (Intensity of environmental regulation)	300	79757.89	59361.06	12451.86	380673
TEI (Level of technology innovation)	300	1.5636	1.092524	0.34	6.17
VCE (Degree of global value chain embeddedness)	300	6004.96	3442.668	1250.844	27830.78
TRO (Degree of trade openness)	300	0.1239135	0.186216	.0001067	1.00838
MAI (Level of marketization)	300	6.429967	1.897634	2.33	10.79
ECD (Level of regional economic development)	300	48326.17	24770.54	11062.14	140761.3

Before the regression analysis, we conducted Pearson’s correlation analysis of the main research variables. The results shown in Table 2 indicate that the correlation between the upgrading level of industrial structure and environmental regulation intensity was not significant. However, there was a significantly positive correlation between the variable of industrial structure upgrading and both the mediator variables (lnTEI and lnVCE).

Table 2

Pearson correlation analysis of main variables
Variable	lnISU	lnERI	lnTEI	lnVCE	lnTRO	LnMAI	lnECD
lnISU	1.0000
lnERI	0.0707	1.0000
lnTEI	0.7242***	-0.1192**	1.0000
lnVCE	0.3427***	0.4342***	0.1286**	1.0000
lnTRO	0.4112***	-0.3091***	0.6289***	0.1787***	1.0000
lnMAI	0.5780***	-0.1721**	0.7592***	0.3368***	0.7893***	1.0000
lnECD	0.7506***	0.1861**	0.6617***	0.5235***	0.5376***	0.7058***	1.0000
Note:,,** indicate significance levels of 10%, 5%, and 1% respectively.

5.1. Regression Analysis of the Direct Effect

Against the background of the gradual reform that was “from point to surface,” there were significant differences in the path and intensity of the economic reform across China, and the regional economy showed unbalanced growth. As shown in Figs. 2 and 3, there are significant differences in the level of industrial structure upgrading and the intensity of environmental regulation among the eastern region, central region and western region. From 2009 to 2018, the average value of the ISU of eastern region was higher than that of central and western regions, where the average value of the ERI of eastern region was lower than that of central and western regions. Our study conducted an overall regression analysis of Formula 1 using data related to the upgrading level of industrial structure, environmental regulation, degree of trade openness, marketization index, and regional economic development level of 30 provincial administrative regions in China from 2009 to 2018. Furthermore, we used data from the eastern (11 provinces), central (10 provinces), and western (9 provinces) regions as samples, and used Stata 13.0 software to test the direct effect of environmental regulation on the upgrading of regional industrial structure. Based on the results of the nationwide regression shown in Table 3, we deduce that strengthening environmental regulation policies could promote the upgrading of industrial structure, which validates Hypothesis 1. The results of the regional regression showed significant differences in the direct effect of regional environmental regulations on the upgrading of industrial structures. The industrial effect of environmental regulation in the central region was the highest, with an impact coefficient of 0.026301; this was followed by that for the eastern region and then that for the western region. Environmental regulation in the western region showed a non-significant negative impact on the advanced development of industrial structure, and the impact coefficient was small. This indicates that due to factors, such as the region’s geography, environment, education level, population, and capital, the core industry in the western region is primarily agriculture and animal husbandry, which makes it difficult to achieve transformation through more stringent environmental regulations.

From the regression results of the control variables, lnTRO had a significantly negative impact on lnISU in the eastern and western regions, and a significantly positive impact on lnISU in the central region. As the “vanguard” and “leader” of China's reform and opening-up, the eastern region has a relatively good economic foundation. It is actively transferring the processing trade industry to the central and western regions through supply-side structural reforms to concentrate on the development of service trade and high-tech industries. The greater the ratio of the total import and export trades of foreign-invested enterprises to the GDP, the higher the proportion of general and processing trades, and the lower the proportion of service trade. However, this scenario is not conducive to industrial transformation. The central region is relatively rich in natural resources. Its degree of economic development and opening lags behind that of the eastern region. Furthermore, its capital and technology are relatively insufficient, the degree of its dependence on foreign trade is increasing annually, and the marginal contribution of its import and export trades to industrial upgrading is still on the rise. The ecological environment in the western region is fragile, and transportation and logistics costs are relatively high. It is difficult to attract high-quality foreign capital by simply lowering the entry threshold for foreign investors. Additionally, the influx of low-quality foreign capital may aggravate local ecological risks and hinder the sustainable development of the regional economy. Therefore, industrial transformation and upgrading in the western region needs to cultivate endogenous growth momentum according to local conditions. Both lnMAI and lnECD had significant positive effects on lnISU, and the influence coefficient of lnMAI was higher than that of lnECD. This shows that the market mechanism can regulate the behavior of producers through free decision making, fair competition, and price guidance, thereby promoting the dynamic balance between supply and demand, and accelerating the transformation of regional industrial structures. In addition, numerous studies have shown that economic growth comes from the “structural dividend” released by industrial restructuring. The positive impact of lnECD on lnISU in Table 3 shows that economic growth will also react to changes in industrial structure. Furthermore, economic growth would significantly improve the level of per capita income, and changes in consumption structure and capital storage caused by changes in per capita income levels would promote the optimization of the industrial structure.

Table 3

The direct effect of environmental regulation on industrial structure upgrading
Region	Nationwide	Eastern China	Central China	Western China
Variable	lnISU(FE)	lnISU(FE)	lnISU(FE)	lnISU(RE)
	(1)	(2)	(3)	(4)
lnERI	0.0089339*** (2.64)	0.0098532** (2.48)	0.026301*** (3.56)	-0.0016861 (-0.28)
lnTRO	-0.0017762 (-0.88)	-0.0240204*** (-3.52)	0.0151141***(2.90)	-0.0074832*** (-3.58)
lnMAI	0.0840955*** (7.02)	0.0104699 (0.56)	0.1762157***(5.71)	0.0880253***(6.18)
lnECD	0.023635*** (4.12)	0.0281301*** (2.90)	-0.0125536 (-0.81)	0.0158643** (2.16)
Constant term	0.3410801*** (8.42)	0.4081791*** (5.34)	0.405601*** (4.64)	0.5157316***(8.28)
N	300	110	100	90
F or Wald	107.52***	63.85***	48.49***	138.86***
Hausman test	15.06***	27.29***	13.08**
Note: The z or t values are in parentheses after the coefficient value; , , * * indicate significance levels of 10%, 5%, and 1%, respectively.

5.2. Regression Analysis of the Mediating Effect

5.2.1. Regression analysis of the mediating effect of technological innovation

Based on all samples and sub samples of the different regions, this study used Stata 13.0 software to carry out a regression analysis on Formulas 2 and 4 to test whether environmental regulation can affect industrial structure upgrading through the mediator variable of technological innovation. The results are presented in Table 4. The results of the nationwide regression results of Eq. 2 show that lnERI can significantly improve lnTEI, with an influence coefficient of 0.1217306. The regression results of Eq. 4 show that the lnTEI had a significantly positive impact on lnISU, with an influence coefficient of 0.0318135. lnERI also had a significantly positive impact on lnISU with an influence coefficient of 0.0090599, indicating that the mediating effect is significant, which verifies Hypothesis 2. The regional regression results show that the mediating effect of technological innovation is significant in the eastern and central regions, but not in the western region. Although tightening environmental regulations can improve the technological innovation capability of the western region, it still fails to promote the upgrading of regional industrial structures. Why is the mediating effect of technological innovation only reflected in the eastern and central regions? This is because in these regions, the implementation of environmental regulation policies can induce primary technological progress, improve the efficiency of resource allocation, and promote changes in market supply quality and supply structure. Moreover, because the eastern and central regions are more densely populated, and the scale of the consumption market is large, this can provide strong support for the transformation of the supply market. In other words, in the eastern and central regions, the “technological innovation” and “consumption upgrading” triggered by environmental regulation can form a positive interaction that can activate the internal circular economy, stimulate industrial structure upgrading, and promote high-quality economic development by improving technological innovation. In contrast, although the implementation of environmental regulation in the western region has improved the technological innovation level of its enterprises, it is difficult to undertake the new productivity released by this innovation because of the vast land space and sparse population in this region. Due to geographical factors, the logistics cost of homogeneous products sold to other regions is high, and the higher logistics cost weakens the market competitiveness of the products. Modern industrial systems include not only high-end services and high-tech industries, but also the modernization of traditional industries. Therefore, in the future, the western region should focus on using modern science and technology to promote the comprehensive modernization of traditional industrial production modes based on regional characteristics. It should also be used to promote the transformation and upgrading of the entire industry chain and value chain of the agriculture and animal husbandry sectors.

Table 4

Regression results of the mediating effect of technological innovation
Region	Nationwide		Eastern China		Central China		Western China
Variable	lnTEI(RE)	lnISU(FE)	lnTEI(RE)	lnISU(FE)	lnTEI(RE)	lnISU(FE)	lnTEI(RE)	lnISU(FE)
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
lnERI	0.1317306*** (7.41)	0.0090599*** (2.74)	0.1801807*** (7.28)	0.0115295***(2.94)	0.077883**(2.16)	0.0323703*** (4.26)	0.1074433*** (3.49)	-0.0098699* (-1.74)
lnTRO		-0.0022175 (-1.12)		-0.0225752***(-3.39)		0.0180146*** (3.46)		-0.010297*** (-4.65)
lnMAI		0.0812609*** (6.93)		-0.00684 (-0.35)		0.1825193*** (6.06)		0.108553*** (7.30)
lnECD		0.0151585** (2.50)		0.0156242 (1.47)		-0.0306526* (-1.82)		0.0017544 (0.25)
lnTEI		0.0318135*** (3.68)		0.0380342**(2.56)		0.0388884** (2.45)		0.0705685*** (5.16)
Constant term	-1.19617*** (-5.41)	0.4254966*** (9.30)	-1.302508*** (-3.81)	0.5410021***(5.97)	-0.7801803* (-1.89)	0.5248031*** (5.36)	-1.236278*** (-3.20)	0.710491*** (10.64)
N	300	300	110	110	100	100	90	90
F or Wald	56.80***	92.76***	52.96***	55.37***	4.67**	42.24***	12.19***	41.71***
Hausman test		28.77***		14.19**		34.58***		15.52***
Note: The z or t values are in parentheses after the coefficient value; , , * * indicate significance levels of 10%, 5%, 1% respectively.

5.2.2. Regression analysis of the mediating effect of global value chain embeddedness

Based on all samples and sub samples of the different regions, this study used Stata 13.0 software to carry out regression analysis on Formulas 3 and 5. This was done to measure whether environmental regulation can affect industrial structure upgrading through the mediator variable of global value chain embeddedness. As shown in Table 5, the nationwide regression results obtained using Eq. 3 show that lnERI can significantly improve lnVCE. The regression results of Eq. 5 show that lnVCE had a significantly positive impact on lnISU. Furthermore, the positive effect of lnERI on lnISU was also significant. This indicates that the mediating effect is significant, which verifies Hypothesis 3. By embedding the GVC, China imitates the advanced production technology, management concept, and economic and trade rules of developed countries. In doing this, China also cultivates and constructs a perfect intermediate production chain; continuously accumulates high-quality production factors; and promotes the perfect domestic division system to climb to a high level of GVC to promote the optimization of the region’s industrial structure. The results of the regional regression show that there are significant differences in the mediating effects of the global value chain embeddedness. The mediating effect of global value chain embeddedness in the eastern and central regions was significant. In the western region, strengthening environmental regulation can significantly enhance its embedded position in the GVC, but the increase in lnVCE significantly hinders lnISU, which is inconsistent with Hypothesis 3. This may be because the eastern and central regions have a relatively high level of human capital, and can make full use of the knowledge, information, and technology of the GVC, along with other relevant horizontal resources. Through learning high-technology and advanced management concepts from developed countries, by embedding the chain, they can gradually move to the middle and high ends of the GVC in the industrial division. In contrast, the western region suffers from disadvantages, such as insufficient talent supply and slow development of information technology. Moreover, it learns, absorbs, and digests innovative technologies poorly; therefore, it is always in a “captured” position in the GVC. Enterprises are easily locked in the industries with low added value and simply “follow” the pace of globalization set by the developed countries.

Table 5

Regression results of the mediating effect of global value chain embeddedness
Region	Nationwide		Eastern China		Central China		Western China
Variable	lnVCE(RE)	lnISU(FE)	lnVCE(FE)	lnISU(RE)	lnVCE(FE)	lnISU(FE)	lnVCE(FE)	lnISU(FE)
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
lnERI	0.6026845*** (13.78)	0.0057106* (1.70)	0.6058551*** (10.52)	0.0018247 (0.44)	0.652051*** (7.74)	0.0138902** (2.60)	0.8928349*** (8.89)	-0.0003427 (-0.05)
lnTRO		-0.0022315 (-1.14)		0.0100715 (1.46)		0.0069845* (1.86)		-0.0054933** (-2.30)
lnMAI		0.0729222*** (6.12)		0.0422984** (2.26)		0.0999965*** (4.33)		0.1109811*** (6.26)
lnECD		0.0108688* (1.72)		0.0348128*** (3.61)		-0.0421131*** (-3.72)		0.0263128*** (2.68)
lnVCE		0.0158592*** (4.21)		0.0252237*** (4.30)		0.0604142*** (9.50)		-0.0127298* (-1.95)
Constant term	1.902034*** (3.91)	0.3957976*** (9.56)	2.069383*** (3.30)	0.1921552*** (2.68)	1.336443 (1.43)	0.4440336*** (7.24)	-1.591103 (-1.41)	0.4746373*** (6.41)
N	300	300	110	110	100	100	90	90
F or Wald	189.98***	94.98***	110.64***	266.57***	59.92***	97.12***	79.10***	29.04***
Hausman test		37.51***	8.69***		16.75***	15.79***	6.36**	32.19***
Note: under the coefficient value, t value or Z value are in brackets, , , and * indicate that they are significant at 10%, 5% and 1% significance levels respectively.

Based on the theoretical analysis of the influence mechanism of environmental regulation on industrial structure upgrading, our study used panel data from 30 provinces in China, from 2009 to 2018, to empirically test how environmental regulation promotes industrial structure upgrading. The conclusions are as follows:

(1) Tightening environmental regulations can directly accelerate the upgrading of industrial structure. The direct effect in the central region was the highest, followed by that of the eastern region. However, strengthening environmental regulations may hinder the upgrading of industrial structure in the western region. Under the progressive reform path, there were significant differences in the level of industrial structure upgrading among the three regions in China. As shown in Fig. 2, from 2009 to 2018, the average value of the industrial structure upgrading index of the eastern region increased from 2.37718 to 2.250409, whereas that of the central region increased from 2.2393 to 2.3917. Furthermore, the industrial structure upgrading index for the western region increased from 2.26667 to 2.37756. The upgrading level of the industrial structure in the eastern region was significantly higher than that of the central and western regions, and there was little space for industrial optimization that relies on environmental regulation. The central and western regions have relatively low levels of industrial structure upgrading, but large scopes for industrial transformation and upgrading. Furthermore, the natural resources and human capital of the central region are better than those of the western region. The central regions undertake more industries with high pollution and high-energy consumption that were transferred from the eastern region. Notably, environmental regulation plays an important role in promoting the central region to eliminate the overcapacity of marginal industries and improve total factor productivity. The economic development of the western region has lagged behind for a long time, and the horizontal competitive advantage is insufficient. The strict environmental regulation policy would further weaken its competitive advantage in the secondary and tertiary industries, and hinder the industrial change and advanced development of the western region.

(2) The strengthening of environmental regulation can accelerate the optimization and upgrading of regional industrial structures through the mediator variable of technological innovation. The mediating effects of technological innovation in the eastern and central regions were superior to those in the western region. In the future, the eastern and central regions can promote iterative upgrading of the old and new industries. They can also develop a high-quality internal circular economy that relies on high-intensity environmental regulations that would promote the formation of a positive interaction between “technological innovation” and “consumption upgrading.” Due to the “double poverty” of economy and ecology, the western region’s industrial development has lagged behind for a long time. Therefore, it is necessary to develop advanced agriculture and animal husbandry based on tougher environmental regulations, and then drive the high-quality development of regional economy through the internal transformation of agriculture and animal husbandry.

(3) Environmental regulation can promote the upgrading of a region’s industrial structure by deepening the global value chain embeddedness. The mediating effects of global value chain embeddedness in the eastern and central regions are better than those in the western region. The eastern and central regions have a large economic volume, which can improve the embeddedness of the GVC by enhancing the entry threshold for foreign investors, with the help of environmental regulations, to make full use of the resources and knowledge of the global value chain. It can also be used to promote the dual circulation of domestic and international markets, and enhance the advanced development of regional industrial structures. The economic volume of the western region is relatively small, and its ability to absorb and utilize the horizontal resources in the GVC is poor. It is still in the “follow-up” stage in the scope of globalization, and the economic bonus obtained by embedding the GVC with the advantage of resource endowment is extremely limited.

(4) Industrial structure upgrading is a complex, social, and systematic project. The environmental regulation, trade openness, marketization level, regional economic development level, and other factors jointly affect the transformation and upgrading of regional industrial structures. The high-quality development of the national economy depends on the cooperation of reforms in environmental, economic, political, foreign trade, and other relevant fields.

Based on the above-mentioned conclusions, to better exert the positive role of environmental regulation in the transformation of regional industrial structure, and promote the quality and efficiency of the national economy, alternative policy recommendations have been proposed as follows:

(1) It is crucial to pay attention to the regional heterogeneity of environmental regulation for industrial structure upgrading, and to construct an inclusive environmental regulation system to promote the green transformation of regional economies. Each region should seek precise environmental regulations based on its own resource endowment, industrial advantages, and location conditions. The eastern and central regions need to benchmark international environmental protection regulations, standards, and laws; tighten environmental regulations; and promote the efficient allocation of resources and the iterative upgrading of new and old industries. Therefore, the western region should appropriately reduce environmental protection standards to realize the qualitative transformation of economic structure on the basis of the growth of economic volume.

(2) It is important to inspire local enterprises to increase investment in R&D using new environmental regulation policies, such as green tax, green credit, and green bonds. This would improve the international level of scientific and technological innovation, while focusing on breakthrough key technologies, such as chips, lithography machines, operating systems, core algorithms, scanning electron microscopy, and high-end resistance capacitors. It would also be important to build the technical advantages of local enterprises, then cultivate the new driving force of real economic development, and provide “technical support” for upgrading the industrial chain.

(3) The government should deepen the reform of “Deregulation & Regulation & Service,” while continuously optimizing the business environment. It should also focus on improving the global value chain-oriented trade and investment policies, strengthening the accurate docking with international trade rules, exploring a more flexible and free opening-up system, and reducing unnecessary intervention on microeconomic activities. Furthermore, improving the level of trade liberalization and facilitation, reducing the institutional transaction costs of enterprises, and attracting more high-quality foreign-funded enterprises to enter the domestic market should also be a priority for the government. This is crucial for making full use of the high-value production factors in the GVC to promote the optimization and upgrading of the domestic industrial structure.

(4) It is necessary to combine the upgrading of the industrial chain with the expansion of domestic demand, make full use of the huge domestic market, accelerate the construction of a perfect domestic demand system, and cultivate and expand the new forms of consumption (such as online education, medical services, mobile games, information apps) that have spawned during the prevention and control of the COVID-19 outbreak. All this should be done while continuously smoothing the linkage of economic activities among different regions in China, enhancing the growth resilience of domestic industries, and striving to promote the formation of a new development pattern, in which the domestic economic cycle plays a leading role. At the same time, the international economic cycle should remain as the domestic economic cycle is extended.

Declaration of interests

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this study.

Acknowledgements

This study is sponsored by National Social Science Foundation of China (16BJL078) and Talent Team Construction Project of Shanghai Customs College (2315001A2020).

Authors contributions Xiao Yu: Conceptualization, Methodology, Software, Data curation, Writing-Original draft preparation, Visualization, Investigation, Funding acquisition. Xing Zhang: Writing-Original draft preparation, Software, Writing- Reviewing and Editing, Validation. Yong Li: Writing original manuscript, conceptualization, methodology, writing review and editing.

Data availability Data and relevant materials will be available from the corresponding author through email.

Ethics approval This research study was conducted according to the Declaration of Helsinki guidelines and compliance with ethical standards. The ethics statement is approved by School of Marxism, Shanghai Maritime University.

Consent to participate Informed consent was obtained from all respondents belonging to this research study.

Consent for publication Not applicable.

Competing interests The authors declare no competing interests.

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How Environmental Regulation Promotes Industrial Structure Upgrading – An empirical study based on the mediating effect method

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Abstract

Figures

1. Introduction

2. Literature Review

3. Research Hypothesis

3.1. Direct Effect of Environmental Regulation on Industrial Structure Upgrading

3.2. Mediating Effect of Technological Innovation

3.3. Mediating Effect of Global Value Chain Embeddedness

4. Material and Methods

4.1. Model Construction

4.2. Variable Description

4.2.1. Explained variable: industrial structure upgrading

4.2.2. Core explanatory variable: environmental regulation

4.2.3. Mediating variables

4.2.4. Control variables

4.3. Data Source

4.4. Descriptive Statistics and Correlation Analysis

5. Results and Analysis

5.1. Regression Analysis of the Direct Effect

5.2. Regression Analysis of the Mediating Effect

5.2.1. Regression analysis of the mediating effect of technological innovation

5.2.2. Regression analysis of the mediating effect of global value chain embeddedness

6. Conclusions

Declarations

References

Status:

Version 1