**1. Introduction**

Since the reform and expansion in 1978, China has achieved remarkable economic growth achievements which benefited greatly from the large scale of the government's leading investment and factor input [1–3]. However, extensive economic development, at the cost of high energy consumption and high emissions, has caused severe problems of resource exhaustion and environmental pollution, which have seriously affected the sustainable growth of China's economy, as shown in Figure 1. Currently, as the world's second-largest economy, China is facing the dual pressure of economic development and environmental protection. Meanwhile, China's economy has entered a "new normal" period, shifting from high-speed growth to high-quality development and total factor

**Citation:** Xu, X.; Li, X.; Zheng, L. A Blessing or a Curse? Exploring the Impact of Environmental Regulation on China's Regional Green Development from the Perspective of Governance Transformation. *Int. J. Environ. Res. Public Health* **2022**, *19*, 1312. https://doi.org/10.3390/ ijerph19031312

Academic Editors: Roberto Alonso González Lezcano, Francesco Nocera and Rosa Giuseppina Caponetto

Received: 27 December 2021 Accepted: 21 January 2022 Published: 25 January 2022

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**Copyright:** © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

productivity (hereafter, TFP) has become the core indicator to measure the degree of highquality economic development [4,5]. Because the traditional measurement of TFP ignores energy input and does not consider the negative externalities caused by environmental pollution, it is easy to bring about a measurement bias and it cannot truly reflect the quality of economic development [6]. Green total factor productivity (hereafter, GTFP), namely, the total factor productivity when considering environmental protection and economic efficiency, has attracted widespread concerns at home and abroad [7,8]. Therefore, the improvement of green total factor productivity and the promotion of a green economic transformation have become research hotspots in recent years [9–11].

**Figure 1.** Trends of China's energy consumption, pollutant emissions, and GDP growth. Source: author's calculation with data from China Statistical Yearbook (2004–2018).

With the increasingly sharp contradiction between the environmental carrying capacity and green economic development, strengthening environmental regulation has gradually become a global trend, and China is no exception [12–16]. Faced with severe environmental pressures, Chinese policy makers have formulated a series of strict environmental regulatory policies to address pollution problems. Especially after the 18th CCP National Congress, the central government of China began tightening environmental pollution control, with the enforcement of the new Environmental Protection Law in 2015 and the Thirteenth Five-Year Plan for Ecological Environment Protection in 2016. In addition, 31 provinces in mainland China had been all covered by the central environmental protection supervision system by 2017 and the goals of achieving Ecological Civilization and Beautiful China were also clearly put into the Constitution in 2018. Currently, one of the main objectives of environmental regulation in China is to establish a green and low-carbon circular economic system, in which the driving force of economic growth is changed from investment to innovation [17,18]. In this context, the goal is to reverse the negative environmental impact of economic development and explore the realistic path of green transformation. In view of this, by investigating the effect of environmental regulation on GTFP and its mechanisms, this paper is expected to provide references for formulating reasonable environmental regulation policies for improving GTFP, as well as having important practical significance on the promotion of the high-quality development of China's economy.

It is undeniable that the rapid development of China's economy stems largely from the reform and innovation of the economic system [7,19]. In the process of more than 40 years of reform and expansion, the Chinese government has always adhered to the guidelines for establishing a modern market economic system. The role of the market mechanisms in resource allocation has gradually increased, realizing its fundamental transformation from the auxiliary position, to the basic position, and then to the decisive role [20]. The 19th CCP National Congress in 2017 further proposed to speed up the establishment and improvement of the socialist market economic system. Therefore, the relationship between the government and the market, namely, the governance changing from administrative governance to economic governance, is constantly adjusted [21]. Obviously, the role of governance transformation in promoting sustainable economic growth cannot also be ignored. However, few scholars have deeply explored the growth effect of governance transformation from the perspective of GTFP [22]. As a big developing country, China continues reforming towards the socialist market economy. The relationship between governance transformation and GTFP, as well as whether governance transformation can accelerate the dividend effect of environmental regulation on GTFP, are theoretical and practical issues worthy of in-depth exploration [23–25].

This paper mainly aims to explore the effect of environmental regulation and governance transformation on GTFP in China. Specifically, based on the theoretical analysis, we use Chinese provincial panel data from 2003 to 2017 to empirically investigate the impact of environmental regulation and governance transformation on GTFP, which is analyzed by constructing a dynamic panel data regression model and using a system generalized moment estimation method. The results showed that environmental regulation inhibited the increase in GTFP in the short term but promoted the growth of GTFP in the long term, and there was a nonlinear U-shaped relationship between environmental regulation and GTFP in China. Meanwhile, the impact of governance transformation on GTFP was significantly positive and, therefore, governance transformation can accelerate the realization of the Porter hypothesis, which reflects the promotional effect of environmental regulation on GTFP. In addition, the results also showed that there was regional heterogeneity in the impact of environmental regulation on GTFP based on the significance of the nonlinear impact in the eastern and western regions. The influence was not obvious in the central region.

The main contributions of this study to the literature are as follows. Firstly, we incorporated environmental regulation, governance transformation, and GTFP into a unified analytical framework in which the internal relationship between the three variables was investigated. Therefore, the research conclusions provide a more comprehensive understanding of the inherent mechanisms of the green growth effects on environment regulation. Secondly, we introduced resource exhaustion, environmental pollution, and economic growth into a productivity evaluation system and estimated the GTFP of China's 30 provinces by using the Global Malmquist-Luenberger (GML) index based on the directional distance function. This enabled us to inherit the advantage of traditional productivity indexes, e.g., the Malmquist-Luenberger index, while alleviating the infeasibility problem and providing a more comprehensive calculation process. Thirdly, the linear term and quadratic term of environmental regulation were both introduced into the econometric model to explore the possible nonlinear relationship between environmental regulation and GTFP. In addition, to provide a sound theoretical basis for formulating differentiated environmental policy systems, we further analyzed the regional heterogeneous effects of environmental regulation on GTFP by dividing the balanced panel into three subsamples, namely, the eastern region, the central region, and the western region. Fourthly, the interaction effect of environmental regulation and governance transformation was also added into the empirical model, testing the moderating effect of governance transformation on the relationship between environmental regulation and GTFP. Finally, we empirically investigated the impact of environmental regulation and governance transformation on China's provincial GTFP by using a dynamic panel model and system-generalized methods of moment (SYS-GMM) to overcome the possible endogenous problem.

The remainder of this paper is organized as follows. Section 2 briefly reviews the relevant literature and proposes three theoretical hypotheses. Section 3 describes the data sources and methods used in the empirical analysis. Section 4 discusses the empirical estimation results. Section 5 concludes the study and highlights several policy implications.

#### **2. Literature Review and Research Hypotheses**

#### *2.1. Literature Review*

When it comes to environmental regulation, governance transformation, and GTFP, previous studies have focused on the relationship between environmental regulation and GTFP, the relationship between governance transformation and GTFP, and the realization of the conditions of the Porter hypothesis. Therefore, in this section, we also review the related literature from these three aspects.

#### 2.1.1. The Relationship between Environmental Regulation and GTFP

With the increasing attention to the quality of the ecological environment, many scholars have adopted various methods to explore the impact of environmental regulation on GTFP [9,26–29]. However, the existing literature has not yet reached a consensus on the relationship between environmental regulation and GTFP [13]. Some studies hold the view that the essence of environmental regulation is to internalize the negative externalities of pollution, for it will inevitably bring additional costs to enterprises. Therefore, environmental regulation will inhibit the improvement of productivity [30,31]. Hancevic [12] claimed that environmental regulation will restrain the improvement of productivity owing to increases in pollution control costs. Zhang and Jiang [32] investigated the effect of the environmental policy on a firm's green productivity by using Chinese coal-fired power plant data from 2005 to 2010 and found that stringent environmental regulation will damage green productivity growth. Cai and Ye [33] discussed the impact of the enforcement of China's new environmental protection law on enterprises' TFP by using DID model and proved that environmental regulation can give rise to a decline in enterprises' TFP due to financial constraints. This conclusion is also supported by Du et al. [15] who indicated that environmental regulation would restrain green technology innovation. Conversely, some scholars believe that strict and well-designed environmental regulation can stimulate corporate innovation activities aimed at reducing compliance costs, enhance enterprises' competitiveness, and promoting their productivity [34]. Lanoie et al. [35], using survey data from seven OECD countries in 2003, examined the effect of environmental regulation on productivity. They confirmed the weak Porter hypothesis and concluded that environmental regulation could promote TFP growth. Wang and Shen [36] focused on the effect of environmental regulation on the environmental productivity of China's industries over the period from 2000 to 2012 and found that environmental regulation and environmental productivity were positively correlated, which, to a certain extent, validates the Porter hypothesis. Based on the panel data of the OECD countries' industrial sectors between 2004 and 2009, Wang et al. [13] discussed the effect of environmental policy stringency on green productivity growth and confirmed that environmental regulation had a positive impact on green productivity growth. Zhang [14] adopted the dynamic panel model to explore the impact of environmental regulation on the green productivity of Chinese manufacturing firms and found that environmental regulation facilitated GTFP, especially in state-owned enterprises. In addition, some people have claimed that the impact of environmental regulation on GTFP is uncertain, for the compliance cost effects and the innovation compensation effects exist simultaneously. Based on the panel data of China's carbon-intensive industries from 2000 to 2014, Zhao et al. [37] found that there was an inverted U-shaped relationship between environmental regulation and GTFP, demonstrating the inexistence of the Porter hypothesis in the long term. Qiu et al. [38] employed the FGLS model and the dynamic GMM model to analyze the effect of environmental regulation on the GTFP of China's industrial sectors and verified a nonlinear U-shaped curve relationship between environmental regulation and GTFP. This result is consistent with that of Shen et al. [39] who found that the effect of environmental regulation on GTFP exhibited a significant U-shaped relationship from a provincial perspective. However, none of the above literature has examined the impact of environmental regulation on China's provincial GTFP, which is of great significance for formulating differentiated environmental regulation policies to promote GTFP growth.

#### 2.1.2. The Relationship between Governance Transformation and GTFP

Regarding the relationship between governance transformation and GTFP, most firmlevel evidence showed that market-oriented governance transformation, as an important institutional arrangement, can significantly facilitate GTFP. From the perspective of the influence mechanisms, three research hypotheses have been formed. The first hypothesis is the transaction cost effects. A well-developed marketization mechanism can effectively reduce the transaction costs and the investment risk of enterprises, which contributes to the enhancement of the profitability and production efficiency [21,40,41]. Zhang and Liu [20] argued that enterprises located in more developed market systems were highly related to more bank loans and other financial intermediaries, because efficient financing channels can fully meet the amount of capital investment required by enterprises to achieve the targeted GTFP. Therefore, market-oriented reforms raise the enterprises' return on capital and investment, as well as improving GTFP [19,22]. The second hypothesis is the resource allocation effects. It is widely accepted that market mechanisms can directly enhance the operational flexibility of enterprises through the rebound effect, which can help to decrease the originally expected inputs, as well as increasing outputs [42]. Moreover, high-level market systems can improve the allocation efficiency of resources among and within enterprises and can boost the productivity of enterprises [24]. Bin et al. [23] analyzed the effect of the within-industry allocation efficiency on firm productivities and argued that the improvement of the resource allocation efficiency had a strongly positive influence on TFP growth. This conclusion has been confirmed by Lin and Chen [10] who found that factor market distortion inhibited China's GTFP growth. The third hypothesis is technological innovation effects. Some previous studies found that GTFP growth was significantly positively correlated with innovation and that well-developed market systems stimulated the innovative activities of enterprises aimed at obtaining high profits, which contributed to the promotion of the enhancement of production efficiency [13,43,44]. Audretsch and Belitski [45] adopted firm-level unbalanced panel data to examine the effect of R&D on productivity and verified that the effort of innovation had a positive effect on green productivity by promoting technology transfer in a well-developed marketization environment. Zhang and Vigne [46] found that innovation efficiencies had a positive and significant impact on GTFP because of the benefits of market-oriented reforms. However, few scholars have empirically tested the impact of governance transformation on China's GTFP from the provincial level perspective, especially the impact of regional heterogeneity on the relationship between governance transformation and GTFP, implying that geographic location is an important factor affecting the growth effect of governance transformation.
