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Chinese government adopted a new environmental program during "Eleventh Five-Year Plan" period. Whether this program can achieve its goal of pollution reduction and quality improvement for exports is of vital importance for China's sustainable development. This paper constructs a quasi-difference-in-difference (DID) framework to identify the effects of the new environmental policy on export product quality by using highly disaggregated trade transaction data at the product level. Empirical results show that the implementation of pollution reduction targets is negatively correlated with export product quality. This negative impact is more profound in western regions, capital-intensive industries, privately owned firms and firms exporting to countries which are not members of Organization for Economic Co-operation and Development group. In addition, our extended analysis shows that the negative effects can be mitigated through product switching within the firms. The major policy implication is that local governments should take proper measures to strengthen the effects of innovation offsets caused by environmental regulation and effectively utilize the induced effects of environmental regulation on product switching. The goal is to achieve a win-win outcome for environmental protection and improvement in export product quality. • Pollution reduction enforcement significantly reduces export product quality. • Innovation can be an offsetting force for this negative impact. • The negative effects can be mitigated through product switching within the firms. • There are variations across regions, sectors and ownership. • Environmental regulation should accommodate these differences. [ABSTRACT FROM AUTHOR]

Using firm establishment-level data combined with provincial socio-economic characteristic panel data in China for the period of 2011–2015, this study seeks to empirically examine the impact of environmental regulation on location choices of polluting firms. The results of the conditional logit model provide compelling evidence that environmental regulations do affect the location choice of firms in polluting industries. Instead of supporting the pollution haven effect, our results consistently confirm the Porter effect at the country level. This result is robust when taking endogeneity problem into account, adopting various model specifications and estimation strategies, using alternative measurements of environmental regulation and location choices, and subsampling excluding international political events. However, the results also show divergent effect of environmental regulation on location choices for heterogeneous firms. Specifically, polluting firms in eastern region prefer to invest in provinces with stringent environmental policies but those in other regions, especially in northeastern region, choose to locate in provinces with lax environmental regulation. While water-dependent polluting firms with a low level of footlooseness are more likely to enter locations with loose environmental regulation, air pollution-intensive firms tend to locate in provinces with tight environmental legislation. These results have policy implications for transitional China as well as other developing countries with similar experience. Image 1 • We study the impact of environmental regulation on polluting firms' location choices. • We employ conditional logit model to analyze the firm establishment-level data. • Our results consistently confirm Porter effect rather than pollution haven effect. • The result is robust to consider endogeneity problem and to various robustness tests. • Divergence effect of environmental regulation for heterogeneous firms is also discovered. [ABSTRACT FROM AUTHOR]