Does strict environmental regulation enhance the global value chains position of China's industrial sector?

Abstract

Given the vital importance of global value chains (GVCs) position for a country's international competitiveness, this paper tries to investigate the impacts of environmental regulation on the GVCs position of China's industrial sector. Using the latest value-added decomposition method, we first measure the GVCs position of China's industrial sector from 2003 to 2014. Subsequently, both two-stage least squares (2SLS) method with panel data and mediating effect model are employed to empirically examine the effects of environmental regulation on China's position in GVCs. The results indicate that environmental regulation has significantly upgraded the GVCs position of China's industrial sector, and the effect is more evident for the sub-sectors with originally lower GVCs position. The mediation effect test shows that increasing R&D investment is an important channel through which environmental regulation affects the GVCs position of China's industrial sector, which verifies the existence of the Porter hypothesis. Further analysis finds that the enhancement of GVCs position of China's industrial sector caused by environmental regulation is mainly achieved through reducing the backward GVCs position.