*2.2. Research Hypotheses*

Based on the existing research and the reality of China's industrial economic development, in this section we analyze the influence mechanisms of environmental regulation and governance transformation on GTFP systematically, and we put forward three research hypotheses to be tested.

#### 2.2.1. The Theoretical Mechanism of Environmental Regulation on GTFP

From the previous literature, it should be noted that the impact of environmental regulation on GTFP mainly depends on the comprehensive effects of an innovation decline and a value promotion [13]. To be specific, the decline in innovation is due to the decrease in innovation resources, which are mainly encroached by environmental regulation costs. The improvement of value is due to the contribution of the green process innovation, which can be spawned by environmental regulation. On the whole, the previous studies have greatly deepened our understanding of the effect of environmental regulation on GTFP; however, what we need to highlight is that the great majority of these studies ignored the dynamic effects of environmental regulation when analyzing its role. Specifically, when environmental supervision is less strict, the implementation of environmental regulation not only increases the pollution control costs but also stimulates extensive production and restrains green economic efficiency, which are referred to as the "cost effect" and the "crowding-out effect", respectively [34]. However, with the improvement of environmental regulation stringencies, enterprises must continue to increase their environmental investment to carry out green technology innovations. This gradually compensates for the compliance costs and contributes to green productivity in the long run, which is called the "innovation compensation effect" [38,53]. Thus, environmental regulation will weaken the enterprises' competitiveness in the early stages, but it can stimulate innovation and promote productivity over the long term. Hence, the following hypothesis is proposed:

**Hypothesis 1 (H1).** *Environmental regulation may inhibit GTFP in the short term and can promote GTFP in the long term and there is a U-shaped relationship between environmental regulation and GTFP.*

#### 2.2.2. The Theoretical Mechanism of Governance Transformation on GTFP

Theoretically, governance transformation reflects the persistent improvement of the degree of marketization in a country or a region. The socialist governance transformation can be categorized into two models: the Soviet model, which strongly argues for shock therapy, and the Chinese model, which advocates for a gradual reform. Compared with the Soviet model, the Chinese model can better cultivate a unified and open market economy and can create a fair and orderly institutional environment for private enterprises. In addition, it can improve the innovation incentive mechanisms, optimize resource allocation efficiencies, and promote enterprise productivity. From the previous literature, in order to clarify how market-oriented governance transformation affects GTFP, the key is to find out the way towards the improvement of GTFP. From the perspective of enterprises, the sources of GTFP growth are determined by two fundamental forces [23,54]. The first is the improvement of the corporate internal production efficiency caused by technological progress, which stems from R&D investment, technology introduction, a deepening of division of labor, the enhancement of the management level, and the optimal allocation of internal resources [10]. The second is the improvement of resource allocation efficiencies among enterprises, specifically where production factors flow from low productivity enterprises to high productivity enterprises, including the creative destruction process, in which low productivity enterprises continue to withdraw from the market and high productivity enterprises continue to enter the market [21]. Hence, by relying on the specialized division of labor and the adoption of advanced green technologies, market-oriented governance transformation can not only promote the enhancement of the internal production efficiency of enterprises, but it can also effectively raise the efficiency of resource allocations among enterprises, which can improve the overall green productivity of the whole society. Therefore, the following hypothesis is formulated:
