Abstract: In the process of China's industrial structure optimization and upgrading, the importance of foreign direct investment to industrial innovation has become increasingly prominent. At the same time, whether the environmental protection policies formulated to deal with the increasingly serious environmental pollution will affect the innovation of foreign-funded enterprises. This paper tries to answer the question through using the micro enterprise data from 2004 to 2007 and using propensity score matching method. The results indicate that: environmental regulation has a significant correlation with innovation of foreign-funded enterprises, and the promotion effect on innovation of foreign-funded enterprises is not only real-time, but also persistent. In addition, the study also find that the effects of environment regulation on different industries are differently.

Key words: environmental regulation, foreign direct investment, innovation, propensity score matching