Does environmental regulation promote industrial structure optimization in China? A perspective of technical and capital barriers

As the largest developing country, China's industrial structure is in a profound adjustment procedure with the background of its structural reforms. The traditional development path is becoming unsustainable. It is increasingly an inevitable choice and also an urgent task for most developing countries in transition to start industrial restructuring. The effectiveness of environmental regulation has been a long-debated issue that is of important reference value for policy makers. Based on the annual panel data of 283 prefecture-level cities in China from 2003 to 2018, this paper builds a comprehensive evaluation of pollutant treatment. And it aims to figure out whether the positive effects of environmental regulation on the industrial structure adjustment exist at the city level. The results show that environmental regulation significantly promotes industrial structure transformation in industry structural optimization. The results remain robustly consistent after being examined through core variable substitution, instrument variable, and dropping special samples. It effectively attracts the inflow of production factors, including technology and capital, which supports industrial structure optimization through innovation offsets and financial deepening. The heterogeneous influences that environmental regulation performs on the industrial structure adjustment are discussed in the further analysis, in the perspectives of geographical location and the resource dependence of a city. Based on the theoretical analysis and empirical results, targeted suggestions are proposed in the end that the local governments under structural transition should sufficiently apply differentiated and suitable environmental regulation tools to the optimized structural evolution of the industry.