How Does Environmental Regulation Enhance Firms’ Competitiveness Through Innovation Incentive in China? A Nonlinear Mediating Model for the Porter Hypothesis

Abstract

Both developed and developing countries have introduced various policies to require enterprises to protect environment by providing green products and service. However, environmental protection is often seen as an obstacle to business development. Professor Michael Porter put forward that this dilemma can be alleviated through innovation. Environmental regulation can enhance firms’ competitiveness by spurring their innovation. It is well known as the Porter Hypothesis which has been examined in many previous studies. However, existing empirical evidence still remains inconsistent. To reconcile the inconsistent result, this study proposes a nonlinear mediating model for the Porter Hypothesis from a holistic perspective. Based on Chinese industry-level panel data of 35 industrial sectors between 2001 and 2010, the empirical results show that environmental regulation has a nonlinear effect on innovation; and innovation shows a nonlinear association with competitiveness. Generally, innovation plays a full and nonlinear mediating role in relationship between environmental regulation and competitiveness. This study reveals the relationships among environmental regulation, innovation, and firms’ competitiveness, which helps government to formulate policies and firms to develop sustainably.