Effects of environmental regulation and FDI on urban innovation in China: A spatial Durbin econometric analysis

Abstract As for the academics and policymakers, more attention has been given to the issue on how to drive urban innovation through the cooperation of environmental regulation and FDI. With the use of a city-level panel data of 285 Chinese cities from 2003 to 2017, this study preliminary explores the impacts of environmental regulation, FDI, and its interaction term on urban innovation at national and regional levels. Specifically, based on the spatial Durbin model under the space-and-time fixed effect, three different spatial weight matrixes (i.e. the first-order adjacency, the inverse distance, and the economic distance) are utilized to check the robustness of the results under different standards. The results indicate that the impacts of FDI and environmental regulation on urban innovation have not achieved the desired goal without the other's cooperation, while most of its interaction term's coefficients on urban innovation are significantly positive, which provides robust support for the establishment of “Porter hypothesis” in China. Moreover, spatial heterogeneity is established, and the uneven development of urban innovation among different regions deserves more attention. In order to effectively increase the ability of urban innovation in China, the government should focus on such solutions as enhancing the implementation and supervision efficiency of environmental regulation, optimizing the structure of FDI, improving the synergistic effects of environmental regulation and FDI, and establishing a multi-scale spatial cooperation mechanism based on both geographical and economic correlations.