Relocate or Innovate? The Impact of Environmental Regulation Stringency on Pollution-Intensive Firms in China

This paper examines the impact of environmental regulation stringency on the location choice of Chinese pollution-intensive firms. We find that the stringency reduces the number and growth rate of pollution-intensive firms in highly regulated regions. An important channel through which stringent environmental regulations hold back firm creation is increased financing costs. We also find that raising environmental regulation stringency has a spillover effect on pollution-intensive firms’ location choice in neighbouring provinces. Overall, the results support the pollution haven hypothesis and uncover a financing-based mechanism underlying the relationship between environmental regulation and firms’ location choice