*2.1. Literature Review*

Many studies focused on the impact of environmental regulation on environmental quality and economic output. For example, studies argue that environmental regulation can effectively constrain pollutant emissions from firms [10–12] and greenhouse gas emissions [13–15], such as environmental protection taxes and emissions trading systems [12,16,17]. The existing studies also tested the pollution haven hypothesis (pollution haven hypothesis) [18–20], which argues that FDI will increase pollutant emissions [21], in which case areas with lax environmental regulation will be more attractive to FDI than strict areas, becoming pollution havens [22].

Then, a part of the study focuses on the microeconomic behavior of firms. It argues that environmental regulation may have some negative effects, such as reducing firm productivity [23], increasing unemployment [24,25], and reducing firms exports [26], among others. However, others also found positive effects, such as favoring industrial structure upgrading [27–29], boosting total factor productivity [30,31], and improving the capacity utilization of firms [12].

In addition, other studies focused on the influence of environmental regulation on corporate innovation, but they remain inconclusive. Based on the Porter hypothesis, reasonable environmental regulation can promote firm innovation [8]. According to the innovation compensation theory, environmental regulation is a triggering factor for technological change, inducing technological innovation that can compensate for environmental regulation payments [32–34]. Environmental regulation can incentivize companies to green upgrade through advanced technologies, such as cleaner production and green manufacturing [35,36]. Zhao and Sun [37] and You et al. [38] confirmed the validity of Porter's hypothesis.

In contrast, some scholars hold a different opinion that environmental regulation hinders corporate innovation, as strict environmental regulation adds unnecessary costs to firms [39–41]. Influenced by environmental governance costs [42], resources for technological innovation will be squeezed [40,43], which leads to a reduction in innovation activities [44]. Overall, there are many heterogeneities in regions and firms hardly following consistent rules of behavior, and different individuals exhibit differentiated technological innovation behavior under environmental regulatory policy constraints [45,46]. Bitat [47] used a panel of German firms to show that traditional regulatory measures cannot trigger innovative behaviors efficiently on a firm level. Moreover, some studies argued that the impact of environmental regulation on technological innovation is indeterminate and shows a non–linear relationship [48,49].

Given the uncertainty of the above findings, this paper suggests that different environmental regulatory measures and regional characteristics may be responsible for such contrasting results [37], and that the implications of the Porter hypothesis require further research. Moreover, although studies concentrated on the effect of environmental policy implementation on technological innovation, only a few studies examined the effect on green technological innovation [48,50–52]. Related studies show that environmental innovation has a positive impact on firms' competitive capability but may have a negative impact on the ecological footprints [53,54]. There is a positive correlation between green entrepreneurship and green innovation [55]. However, the influence of government behavior on enterprise environmental innovation and upgrade remains uncertain [56,57]. At the same time, the specific impact path of environmental policy on green technology innovation is no further distinction. There are potential endogeneity problems in the existing methods of assessing the effectiveness of environmental regulation.

Based on this, this paper explores how to achieve a win–win outcome for both environmental protection and economic development by studying the impact of environmental regulation on green innovation. The study focused on identifying the direct impact of China's TCZ policy on regional green innovation and the specific effect paths. We seek to expand the theoretical framework between environmental regulation and green innovation.

## *2.2. Theoretical Hypothesis*

Due to the market scale effect and production endowment advantage, enterprises are reluctant to conduct green technology innovation activities. Faced with a market failure dilemma, designing and implementing scientifically sound environmental regulation increasingly became an effective means of addressing energy and environmental issues.

Environmental regulation releases a signal that the pollution will be controlled and regulated by the government effectively, indicating that the environmental quality will be improved. According to existing studies, air pollution is harmful to human health and leads to an increasing probability of cardiovascular and respiratory diseases [58,59]. Thus, air pollution leads to population outflow by significantly increasing residents' willingness to migrate internationally [60]. In contrast, there is a positive relationship between environmental quality and residents' health, implying that the environmental quality is better, and the city has a higher level of residential health [61,62]. The more educated or labor–productive groups are, the more sensitive they are to air pollution [63]. Because the population with high education and labor productivity has more knowledge and skills, they have more choices for work. Therefore, they will choose the cities with better urban environmental quality as the place of working and living. Environmental regulation becomes one of the guarantees of city quality, contributing to the inflow of labor and accumulation of human capital for the target cities.

According to the generalized Hicks theory, the incentive of environmental regulation towards the performance of green technology innovation stems from the implicit compliance costs of firms [50]. Under environmental regulation, companies have to improve their production processes, procedures, or equipment to meet the goal of maintaining legal emission standards over time at a lower cost. In such a case, pollution raises the cost of employing a highly qualified workforce, as they will demand higher salaries to participate in a heavily polluted city. Environmental regulation decreases that cost to a degree. Environmental regulatory policy promotes the internalization of environmental management costs and provides incentives for firms to make green innovation decisions. Thus, environmental regulatory policy, as an exterior compulsory driving force, creates a stimulating effect for green innovation and encourages firms to engage in green technological innovation [64].

At the same time, with the inflow of the workforce, especially high–quality human capital, the accumulation of knowledge and absorptive capacity related to environmental innovation can be increased, leading to improved innovation efficiency [65]. Especially in developing countries, access to external technology spillovers is an important channel for firms to acquire technological innovation capabilities. Under environmental regulations, firms will also have to import more high–quality intermediate goods and capital equipment from outside in the short run to meet higher environmental requirements. The technology spillover effects of trade provide firms with more learning opportunities, thus increasing their level of innovation [66].

Therefore, Hypothesis 1 is proposed according to the mentioned analysis: environmental regulation has a positive effect on green innovation performance.

Hypothesis 2 is proposed according to the mentioned analysis: environmental regulation has a positive impact on green technology innovations by attracting human capital inflow.

#### **3. Data and Empirical Design**
