Environmental regulations in developing countries and the span of firms' production stages: Evidence from China

Despite the well‐established tradeoff between economic development and environmental protection, research on the economic costs of alleviating pollution, especially from the perspective of global value chain upgradation, is scarce. In 2006, in its Eleventh Five‐Year Plan, the Chinese government implemented strict environmental regulations against air pollution. We examine the causal effect of these environmental regulations – which were stricter for higher pollution emission provinces compared with lower pollution emission provinces – on Chinese firms' span of production stages after the policy shock. A difference‐in‐difference‐in‐differences estimation reveals that, first, environmental regulations have a significantly negative effect on firms' span of production stages that robustness checks corroborate; second, the negative effects of environmental regulations on firms' span of production stages are realised through the simultaneous decline in import upstreamness and increase in export upstreamness. Heterogeneity tests indicate that the effects are more significant for firms in eastern China, and foreign‐owned firms; finally, the negative effects are manifested through the emission‐related input and output, productivity, and innovation mechanisms. Meanwhile, there are significant emission reduction effects. These results have implications on environmental policies in developing countries in terms of reiterating the need to achieve the dual objectives of environmental protection and global value chain upgradation.