The Effect of Environmental Regulation and Regional FDI on Firms' Productivity in China: Using a DDD Method

This study employs a difference-in-difference-in-difference (DDD) analysis to examine the effects of environmental regulation on firms' total factor productivity (TFP) while accounting for variations in foreign direct investment (FDI) across different cities. Specifically, the study uses China's SO2 emission trading pilot (ETP) as a quasi -experimental setting. This analysis incorporates temporal, provincial pilot policy, and city-specific FDI differences. A placebo test and a parallel trend test are performed. The results show that SO2 ETP policy can considerably enhance a firm's TFP, supporting the Porter hypothesis. It also demonstrates that the positive effect of ETP on TFP will be enhanced in cities with fewer FDI inflows. On average, a 1% increase in local FDI results in a reduction of around 0.05% in the stimulating impact of the SO2 ETP on firm productivity. Heterogeneity analysis shows that private enterprises are more affected than state-owned enterprises.