Environmental regulation, factor flow, and resource misallocation.

Abstract

To meet the challenges of climate change worldwide, the government of China has committed to taking responsibility for protecting the environment internationally. Industrial enterprises are leaders, promoters, and contributors to green development. The government's continuous supervision of green production can promote the rational allocation of production factors. In this study, a theoretical analytical framework is constructed to illustrate mechanisms underlying the influence of environmental regulation on manufacturing resource misallocation. Employing micro panel data from manufacturing enterprises in China's 235 prefecture-level cities, the degree of resource misallocation between cities and industries, is calculated. We obtain the following results. First, improved environmental regulation intensity significantly decreased the extent of resource misallocation. Second, analysis of mechanism revealed that increased environmental regulation intensity can alleviate resource misallocation through factor flow effect and survival of the fittest effect. Third, heterogeneity analysis displayed that environmental regulation has a prominent "mismatch-removing" impact on eastern, central areas and high industrialization cities, pollution industries. Finally, countermeasures and suggestions are proposed, including strengthening governmental environmental oversight and promoting an orderly flow of factors. This study provides evidence and theoretical support for the idea that resource allocation at the city-industry level can be optimized by environmental regulation.