Abstract: Based on China's industrial database datum, this paper empirically examines whether and how environmental regulatory stringency effects on the Total Factor Productivity(TFP) of enterprises. The study finds that the environmental regulatory stringency has an inverted U-shape in the TFP of enterprises, namely, the TFP of enterprises gradually increase with the increase of regulatory stringency, however, when environmental regulatory stringency increases to a certain extent TFP of enterprises will decline. Further study finds that the appropriate environmental regulation triggers cost-saving innovation more than compensates for the cost of compliance to improve the TFP of enterprises. This paper conducts Robustness Test using different indicators of regulatory stringency and instrumental variable. These results show that the more stringent and properly designed environmental regulation leads to win-win effects between environmental protection and enterprise productivity gains.

Key words: environmental regulation, total factor productivity, Porter Hypothesis, semi-parameter