Environmental regulation, total factor productivity, and enterprise duration: Evidence from China

Abstract Environmental regulation has been confirmed to have an important impact on enterprise productivity, which is regarded as a crucial factor of enterprise duration. However, existing studies have paid little attention to how environmental regulation affects enterprise duration. Using firm‐level data from the Chinese Industrial Enterprises Database (2003–2007) and the stochastic frontier analysis method, we estimate enterprise total factor productivity (TFP) and its four decomposed components (scale efficiency change, technological change, factor allocation efficiency change, and technical efficiency change). Meanwhile, we adopt a comprehensive index to measure the environmental regulation intensity. Furthermore, we use the linear probability model and the proportional hazards model to investigate the effect of environmental regulation on enterprise duration through the mediating role of enterprise TFP. The results show that although environmental regulation per se negatively impacts on enterprise duration, environmental regulation can present a synthetic positive effect on enterprise duration due to its positive effect on enterprise TFP. Specifically, environmental regulation significantly mitigates the scale efficiency and technical efficiency of regulated enterprises. It also stimulates regulated enterprises' technological innovation and improves their factor allocation efficiency. In addition, state‐owned and large‐scale enterprises are more malleable when facing environmental regulations. We propose that the government should encourage enterprises to innovate and improve the allocation efficiency of production factors, so as to achieve the purpose of controlling environmental pollution in stages while extending enterprise duration.