Industrial agglomeration, environmental regulation, and regional environmental performance: Direct and interactive effects

Abstract

The contradiction between the economy and the environment becomes acute as the increasing ecological constraints. It is thus necessary to improve environmental performance and realize the economic-ecological double dividend. To achieve that, co-operative efforts are needed on both production and governance sides, particularly industrial agglomeration and environmental regulation. Based on provincial sections in China spanning 2006 to 2020, we explore the effects of industrial agglomeration and environmental regulation on environmental performance, exploiting a two-way fixed effects model. We also illustrate the potential channels and interactive effects between industrial agglomeration and environmental regulation. The results indicate an inverted U-shaped nexus between industrial agglomeration and environmental performance, while environmental regulation favors environmental performance. Green innovation, factor allocation, deepening of division of labor, and industrial structure upgrading are plausible channels. Besides, we discover the interaction between industrial agglomeration and environmental regulation, where environmental regulation reduces the inflection point of industrial agglomeration, and industrial agglomeration improves the effectiveness of environmental regulation. Our work sheds light on the synergy between production and governance sides, which offers insights into green transition for China and other newly industrialized economies.