Journal of Cleaner Production 243 (2020) 118543

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Flexible environmental policy, technological innovation and

sustainable development of China’s industry: The moderating effect of
environment regulatory enforcement
Baolong Yuan a, Yang Zhang b, *
a
School of Business, Central South University of Forestry and Technology, Changsha, 410004, PR China
b
School of Management, Hunan University of Technology and Business, Changsha, 410205, PR China

a r t i c l e i n f o a b s t r a c t

Article history: How to rely on market mechanism for achieving industrial sustainable development is an important
Received 25 June 2019 issue both to current scholars and policymakers. Technological innovation is regarded as a mediator to
Received in revised form construct a driving mechanism that flexible environmental policy affects sustainable development from
21 August 2019
the “narrow” perspective of Porter’s hypothesis. Meanwhile, environment regulatory enforcement is
Accepted 21 September 2019
Available online 24 September 2019
introduced as a moderator to explore the institutional scenario that drives sustainable development of
China’s industry. Then we have adopted industrial panel data of 30 provinces in 2006e2015 and
Handling Editor: Yutao Wang employed the sys-GMM method for empirical test. The findings show that: (1) flexible environmental
policy can significantly facilitate industrial sustainable development. (2) Flexible environmental policy
Keywords: has a significantly positive impact on technological innovation. Meanwhile, technological innovation is
Industrial sustainable development significantly and positively related to industrial sustainable development, and technological innovation
Flexible environmental policy partially mediates the relationship between flexible environmental policy and industrial sustainable
Technological innovation development. (3) Environment regulatory enforcement positively moderates the relationship between
Environment regulatory enforcement
flexible environmental policy and technological innovation. However, it has a potentially positive but not
significant moderating impact on the relationship between technological innovation and industrial
sustainable development, indicating that there is still an “implementation gap”. (4) From a regional point
of view, technological innovation has partly mediating effects between flexible environmental policy and
industrial sustainable development in the eastern and western regions, and environmental regulatory
enforcement can positively moderate the role of flexible environmental policy in promoting techno-
logical innovation in the eastern region. Finally, this paper puts forward the policy implications.
© 2019 Elsevier Ltd. All rights reserved.

1. Introduction The Porter’s hypothesis asserts that well-designed environmental

With the increasing downward pressure on the global economy
and exacerbating environmental pollution, transforming economic
development model has become an approach to seeking economic
and environmental sustainability. China’s industrial development is
also facing multiple pressures of resource and energy shortage,
environmental pollution and economic recession (Su and An, 2018;
Jin et al., 2019). From the perspective of policy research, environ-
mental regulations have become important institutional factors to
promote the sustainable development (Ramanathan et al., 2018).
* Corresponding author.
E-mail addresses: csuft_ybl@163.com (B. Yuan), ambition.007@163.com
(Y. Zhang).
policy can stimulate firms to carry out technological innovation
that helps enhance their competitiveness (Porter and van der Linde,
1995). If the flexible environmental policy meets the needs of firms,
they can better promote corporate economic performance (Jaffe
and Palmer, 1997), that is, the narrow Porter’s hypothesis. Flexible
environmental policy instruments, such as pollutant discharge fees,
environmental subsidies, emissions trading, environmental taxes,
etc., intend to regulate corporate emission behaviors via market
signals and encourage the polluters to reduce the pollutant
discharge level, or it is a constraint mechanism that controls and
optimizes the society’s overall pollution (Hahn, 1984; Hockenstein
et al., 1997; Majumdar and Marcus, 2001; Popp et al., 2010;
Ramanathan et al., 2018). However, inflexible environmental policy
tools, such as the legally enforceable standards, are not conducive

https://doi.org/10.1016/j.jclepro.2019.118543
0959-6526/© 2019 Elsevier Ltd. All rights reserved.
2 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543
to enterprise innovation (Majumdar and Marcus, 2001;
Ramanathan et al., 2018). In essence, the connotation of flexible
environmental policy and market-based environmental policy is
the same, both of which are based on market mechanism
(Ramanathan et al., 2018). From the perspective of China’s envi-
ronmental policy practice, the government attaches more and more
importance to adopting flexible environmental policy in order to
achieve a win-win situation between economic development and
environmental protection. Therefore, the purpose of this paper is to
study the impact mechanism of flexible environmental policy on
the sustainable development of China’s industry.
The first problem studied in this paper is whether flexible
environmental policy can achieve industrial sustainable develop-
ment by promoting technological innovation. It must make efforts
from two aspects in order to realize the sustainable development of
China’s industry. One is that the driving force should be driven by
factors to innovation, and the other is that the mode should be
transformed from high energy consumption, high emission, and
high pollution to low energy consumption, low emission and low
pollution. Environmental pollution caused by industrial develop-
ment belongs to the negative externality problem, because the
ecological environment cost has not been included in the ac-
counting system of industrial growth. Without the constraints and
guidance of external regulations, industrial enterprises lack in-
centives to undertake technological innovation for they carry
around the principle of minimizing cost and maximizing benefits
(Wang, 2018; Hafezi and Zolfagharinia, 2018). Thus, industrial
sustainable development depends on two-wheel symbiosis drive of
flexible environmental policy and technological innovation.
The second problem is whether environmental regulatory
enforcement can positively moderate the relationship between
flexible environmental policy and technological innovation, as well
as the relationship between technological innovation and industrial
sustainable development, due to the existence of market failure.
With the continuous improvement of environmental policy system,
environmental regulatory enforcement has become an important
factor affecting the policy implementation (Fukuyama et al., 1996;
Marquis and Bird, 2018). Especially, it has exposed many local de-
partments of environmental regulatory authority in the form of
formality, passing through the field, false enforcement, resulting in
poor implementation of environmental policy and environmental
pollution control effect. Moreover, some studies have pointed out
that the implementation effect of environmental policy depends on
the local institutional circumstances (Qi and Zhang, 2014; Du and
Li, 2019). Further, the transformation of innovation requires the
guidance and support of regulations, which directly determines the
integration of innovation and industrial sustainable development
(Sirmon et al., 2007). Consequently, they are important issues need
to be discussed in depth that the moderating effect of environ-
mental regulatory enforcement.
In order to solve the above two problems, this paper takes
technological innovation as the mediator, and uses environmental
regulatory enforcement as the moderator to construct the moder-
ated mediation model. Meanwhile, this paper uses 30 provincial
industrial panel data in China from 2006 to 2015, and applies the
sys-GMM method to carry out the empirical test. Moreover, the
regional heterogeneity effect is analyzed. The results show that,
firstly, flexible environmental policy is beneficial for China’s in-
dustrial sustainable development. Secondly, flexible environmental
policy can promote technological innovation, then technological
innovation can promote industrial sustainable development, and
technological innovation partially mediates the relation between
flexible environmental policy and industrial sustainable develop-
ment. Thirdly, the stricter the environmental regulatory enforce-
ment, the stronger the role of flexible environmental policy in
promoting industrial technological innovation, but the impact of
environmental regulatory enforcement on technological innova-
tion and industrial sustainable development has not been
enhanced. Fourthly, from a regional point of view, technological
innovation has partial mediating effects in the eastern and western
regions, and environmental regulatory enforcement can only
positively moderate the role of flexible environmental policy in
promoting technological innovation in the eastern region.
This paper makes the following contributions to knowledge.
Firstly, from the perspective of the institution, the impact of flexible
environmental policy on sustainable development of China’s in-
dustry is examined. Existing literature on sustainable development
mainly focuses on the review and theoretical research, and the
research objects are mainly enterprises (Caiado et al., 2017; Cancino
et al., 2018; Abbas and Sagsan, 2019; Jose
et al., 2019; Asr et al.,
2019), but few studies analyze the factors that affect industrial
sustainable development in the institutional aspect. Secondly, in
light of the “narrow” perspective of Porter’s hypothesis, this paper
regards technological innovation as a core power and further ex-
plores the impact of flexible environmental policydthe ante-
cedentdon technological innovation, thus constructing the
dynamic chain of industrial sustainable development and enriching
the studies concerning the Porter’s hypothesis. More studies
discuss the weak Porter’s hypothesis, that is, the impact of envi-
ronmental regulation on technological innovation is discussed
(Desmarchelier et al., 2013; Rubashkina et al., 2015; Liao, 2018), or
the strong Porter’s hypothesis, which is impact of environmental
regulation on enterprise industry and regional competitiveness
(Zhao et al., 2015; Rubashkina et al., 2015; Li and Ramanathan,
2018), yet few uses mediating effect model to explore the impact
of flexible environmental policy on technology innovation and in-
dustrial sustainable development. Thirdly, considering the institu-
tional characteristics of the transitional economy China, this paper
establishes the moderated mediation model to examine whether
the impacts of flexible environmental policy on technological
innovation and technological innovation on sustainable develop-
ment will change when environment regulatory enforcement is
stringent, thus providing implications for improving the effects of
flexible environmental policy and technological innovation on
sustainable development. Moreover, taking the institutional sce-
nario into consideration has also expanded the conditions for the
establishment of the Porter’s hypothesis. Fourthly, this paper ana-
lyzes the regional heterogeneity of the impact of flexible environ-
mental policy on technological innovation and industrial
sustainable development, which is helpful to provide targeted
policy recommendations for industrial sustainable development of
different regions.
2. Literature review and research hypotheses
2.1. Flexible environmental policy and industrial sustainable
development
The impact of environmental regulation on industrial economy
and environment has not reached a consistent conclusion. Jaffe and
Palmer (1997) called the influence of environmental regulation on
the firms’ competitiveness as the strong Porter’s hypothesis. The
future researches mainly include four aspects: first, environmental
regulation can promote the economic performance of firms, in-
dustries and regions (Zhang et al., 2019a, 2019b; Du and Li, 2019;
Zhu et al., 2019). Second, environmental regulation can also pro-
mote the environmental performance of firms, industries and re-
gions (Zhu et al., 2019; Wang et al., 2019b; Ouyang et al., 2019).
Third, the impact of environmental regulation on economic and
environmental performance is nonlinear (Qian et al., 2019; Wang
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543
and Shen, 2016; Wang and Shen, 2016, 2016). Fourth, environ-
mental regulation will increase pollutant emissions (Chen et al.,
2018; Hao et al., 2018).
Sustainable development has gradually become a new devel-
opment consensus, that is, to overcome environmental problems
with sustainable development goals and to boost economic growth
through improving the utilization efficiency of resource and energy
and reducing environmental damage (World Bank, 2012; Lin and
Benjamin, 2017; Liu et al., 2018d). The inherent requirement of
industrial sustainable development is to incorporate resource uti-
lization and ecological environment costs into the growth ac-
counting system (Pothen and Welsch, 2019). Sustainable
development model can not only increase social welfare, but also
remarkably mitigate ecological damage and environmental crisis. It
is a resource-efficient, low-carbon, socially inclusive development
model (UNEP, 2011; Loiseau et al., 2016; Liu et al., 2018d).
Based on the market mechanism, flexible environmental policy
is designed by the government, which intends to regulate corporate
emission behaviors via market signals and encourages the polluters
to reduce the pollutant discharge level, or it is a constraint mech-
anism that controls and optimizes the society’s overall pollution
(Hahn, 1984; Hockenstein et al., 1997; Popp et al., 2010). Environ-
mental pollution generated by industrial development is the
negative externality problem. Since the environmental damage cost
is not subsumed into the financial accounting of industrial enter-
prises, industrial enterprises have strong motives to continuously
strengthen the development and utilization of environmental
public products. As a result, industrial development exceeds the
bearing capacity of resources and environment. Following classical
economics, the government should levy pollutant discharge fees on
the emitters according to the amount of pollutants discharged so as
to compensate the difference between marginal private cost and
marginal social cost, thus internalizing environmental negative
externalities (Bitat, 2018; Shi et al., 2019). Therefore, flexible envi-
ronmental policy is feasible means to cope with environmental
problems.
The comparative study on environmental policy reveals that
traditional environmental policies have significant “cost effect” and
“energy rebound effect” (Liu et al., 2018c). The cost of flexible
environmental policy instruments, such as pollutant discharge fees,
emission trading and environmental subsidies, are obviously lower
than that of traditional environmental policies such as command-
and-control regulation (Atkinson and Lewis, 1974; Seskin et al.,
1983; Jaffe et al., 2001; Harrison et al., 2015; Li et al., 2019). It is
this cost advantage that makes flexible environmental policy plays
a significant role in industrial energy conservation and emission
reduction. The impact of flexible environmental policy on industrial
sustainable development is manifested in two aspects. For one
thing, when the government imposes pollutant discharge fees on
polluting enterprises, the operating cost of those enterprises will
increase accordingly. In pursuit of saving cost, enterprises will
optimize processes to reduce emissions of waste water, waste gas,
CO2, PM2.5, etc., which helps to improve industrial environmental
performance (Zhao et al., 2015; Li and Ramanathan, 2018; Hashmi
and Alam, 2019; Wang et al., 2019b). For another, flexible envi-
ronmental policy can convey an ecological signal. For instance, the
government provides environmental subsidies for enterprises who
produce energy-saving and environment-friendly products. These
products can seize market share and form a strong competitive
advantage (Xie et al., 2017). Additionally, Wang et al. (2019a)
believed that China’s market-based policy on energy conservation
and emission reduction plays an important role in promoting sus-
tainable development. Li et al. (2019) found that flexible environ-
mental regulation can promote the efficiency of environmental
governance and realize the green transformation of iron and steel
3
industry. Wang and Shao (2019) also argued that flexible environ-
mental policy plays an important role in promoting green growth in
high-income countries. Therefore, the above arguments lead to the
following hypothesis:
H1. Flexible environmental policy positively associates with in-
dustrial sustainable development.
2.2. Flexible environmental policy and technological innovation
The influence of environmental regulation on technological
innovation is called the weak Porter’s hypothesis (Jaffe and Palmer,
1997). Many literature has studied the influence of environmental
regulation on technological innovation, green innovation, eco-
innovation, product innovation, and process innovation and so
on. Moreover, the results show that environmental regulation has a
significant role in promoting innovation (Rubashkina et al., 2015;
Liao, 2018; Borsatto and Amui, 2019; You et al., 2019). On the
contrary, Zheng et al. (2019) found that the “innovation compen-
sation” effect of environmental regulations is not enough to make
up for the “follow the cost” effect. Li (2019) argued that environ-
mental regulation can inhibit the industrial technical introduction
and cooperation. Feng et al. (2019) suggested that environmental
regulation does not promote urban innovation, but the interaction
between environmental regulation and FDI can promote it. This
also shows that the role of environmental regulation needs certain
external conditions.
With the increasing environmental pressure on industrial firms,
it is necessary for them to readjust the strategies to ensure survival
and legality. Institutional theory is based on this connotation and
emphasizes that organizations need to implement compliance
practices to comply with relevant systems from the government,
thereby obtaining organizational legality in order to survive
(DiMaggio and Powell, 1983). Institutional theory provides a
theoretical perspective through which researchers can identify the
factors that promote organizational survival and legitimacy,
including culture, social environment, regulation (including legal
environment), tradition and history, and economic incentives
(Glover et al., 2014). Therefore, institutional theory is also used to
explain how environmental policy affects the organization to
implement green sustainable activities (Rivera, 2004; Glover et al.,
2014; Andrews-Speed, 2016). Based on the institutional theory,
flexible environmental policy formulated by the government pro-
vide a kind of institutional pressure for enterprises. In line with
their regulation goals, enterprises can freely choose to pay
pollutant discharge fees or cut down emissions through innovation
(Bitat, 2018). As Ramanathan et al. (2017) argued that only with
sufficient flexibility can environmental regulation promote corpo-
rate innovation. Environmental policy will have a certain impact on
the environmental decision-making of enterprises. In order to
respond to and meet the environmental policy goals of the gov-
ernment, enterprises will adopt technological innovation to reduce
the consumption of resources and energy.
Flexible environmental policy can affect technological innova-
tion through two paths. On the one hand, the government’s charges
for pollutants and taxation on resources and energy are reflected by
raising prices, and enterprises have the impetus to conduct tech-
nological innovation for saving cost (Demirel and Kesidou, 2011).
On the other hand, there is a lack of incentives for regions to launch
green technological innovation activities due to dual externality
and the uncertainty. Under this circumstance, the government can
adopt a range of market measures, including environmental sub-
sidies and tax preference, to effectively propel regional industries’
technological innovation (Yang and Yang, 2015; Ramanathan et al.,
2018). Furthermore, numerous literature has demonstrated that the
4 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543
government’s market tools, such as prices, taxes, subsidies, can
foster technological innovation more effectively (Desmarchelier
et al., 2013; Castellacci and Lie, 2017; Cheng et al., 2017; Li et al.,
2018; Fabrizi et al., 2018; Cancino et al., 2018; Zhang et al., 2018c;
Hashmi and Alam, 2019). Accordingly, following the above analysis,
the hypothesis is proposed:
H2. Flexible environmental policy positively associates with in-
dustrial technological innovation.
2.3. The mediating effect of technological innovation
2.3.1. Technological innovation and industrial sustainable
development
Sustainability is a common form of high-quality development.
OECD (2011) argued that future economy is bound to move towards
sustainable growth, and sustainable economic development is
driven by innovation (Droste et al., 2016; Fern
andez et al., 2018).
From the perspective of technology contribution, technological
progress is the core driving force of industrial sustainable devel-
opment (Liu et al., 2018b). From the perspective of factor contri-
bution, the reduction of unexpected output such as waste water,
waste gas and solid waste contributes to the industrial sustainable
development (Liu et al., 2016; Cancino et al., 2018). Furthermore,
the factor-contribution rate can increased via innovation (Antonioli
and Mazzanti, 2017; Silvestre and Tîrca, 2019; Chen and Golley,
2014; Cancino et al., 2018).
Innovation is able to reduce energy or resource consumption
and pollutant discharge per unit output value of enterprises, thus
improving their financial performance and competitiveness and
then promote firms to achieve sustainable development. (Long
et al., 2017; Pan et al., 2019b; Zhang et al., 2019a; Lee et al., 2018;
Abbas and Sagsan, 2019). Moreover, Behnam et al. (2018) found that
open innovation capabilities can promote the firms sustainable
development. At the industry level, shifting from general techno-
logical innovation to green innovation can increase industry labor
productivity as well as utilization efficiency of resources and energy
(Miao et al., 2018). Jose
et al. (2019) found that technological
innovation in the mining industry can promote the sustainable
development of the environment, economy and society. At the re-
gion level, Chen et al. (2017) discussed the influence of eco-
innovation (a special form of technological innovation) on
regional sustainable development from four aspects. First, eco-
innovation can promote green economy growth by reducing
resource input and improving production efficiency. Second, it can
improve social welfare, such as increasing the knowledge of green
production, circulation and consumption of residents, the
employment opportunities related to green production, and the
labor productivity. Third, it helps to increase technological creation
and acquisition, and form the effect of technology accumulation.
Fourth, it contributes to the conservation of natural resources and
environmental protection. Zhang et al. (2018b), Hou et al. (2018)
and Zhou et al. (2019) believed that technological innovation can
promote sustainable development of cities. The higher the city
governance level, the stronger the positive impact of technological
innovation on sustainable development. Su and An (2018) argued
that technological innovation is beneficial for regional sustainable
development, but it has a threshold effect. Ferna
ndez et al. (2018)
and Gu et al. (2019) found that technological progress could
reduce CO2 emissions, thereby ensuring sustainable economic
growth. Fortune examined the case of OECD countries and the re-
sults show that technological innovation can lower carbon emis-
sions. Therefore, the above arguments lead to the following
hypothesis:
H3. Technological innovation positively associates with industrial
sustainable development.
2.3.2. The mediating effect of technological innovation
The development of industrial economy has transformed from
quantitative growth to quality and sustainable development. As a
matter of fact, it comprises the changes in interest pattern and the
game of industrial players. To achieve industrial sustainable
development, it is crucial to adjust this pattern by relying on
institutional innovation. The external institutional structure can
induce revolutions of enterprises in technology R&D, product
structure and marketing model, which will have an influence on
industrial financial performance. Facing flexible environmental
policy, enterprises must respond effectively to meet the public in-
terest demands of the government for environmental protection. In
the meantime, the narrow Porter’s hypothesis asserts that flexible
environmental policy can lead enterprises to engage in techno-
logical innovation. When the benefits of such technological inno-
vation offset the costs of complying with environmental policies, it
can enhance competitiveness of industrial enterprises (Porter and
van der Linde, 1995). The inherent requirement of industrial sus-
tainable development is to establish a resource-saving and
environment-friendly development model. Technological innova-
tion can not only promote industrial sustainable development, but
also meet the government’s environmental policies requirements
(Yu et al., 2017; Hu et al., 2017; Pan et al., 2019a; Cancino et al.,
2018). Guo et al. (2017) found that environmental regulation can
promote the regional green growth performance through techno-
logical innovation. Pei et al. (2019) suggested that environmental
regulation indirectly reduces carbon emissions through technical
efficiency changes in energy-intensive industries. Zhou et al. (2019)
thought that green technological innovation caused by environ-
mental regulation can effectively control urban haze pollution.
Following the above analysis, the hypothesis is proposed:
H4. Technological innovation mediates the relationship between
flexible environmental policy and industrial sustainable
development.
2.4. The moderating effect of environment regulatory enforcement
Environment regulatory enforcement refers to coercing market
players into implementing environmental policies by administra-
tive inspections and reducing violations of environmental stan-
dards (Shimshack and Ward, 2008; Tosun, 2012; Pedersen, 2013).
The two duties of environment administrative department are to
inspect and supervise the regulates, and punish enterprises who
breach environmental regulation (Fukuyama et al., 1996; Heyes,
2000; Pedersen, 2013). Regulated enterprises must make regular
investments in energy conservation and emission reduction to
meet the government’s demands for environmental protection,
which is an additional cost for the enterprises. For the sake of
maximizing profits, in reality, enterprises do not necessarily
implement environmental policies and reduce pollutant emissions.
If environmental policies are not carried out, they may be ineffi-
cient or even ineffective (Fukuyama et al., 1996; Tang et al., 2010;
Lin, 2013). Bechtel and Tosun (2009) mentioned that developing
countries have formulated a multitude of environmental policies,
but the positive impact of environmental regulation on environ-
mental quality is not evident due to not strict implementation.
Considering this, environment administrative department needs to
supervise the implementation of environmental policies (Friesen,
2003).
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543
2.4.1. The moderating effect of environment regulatory enforcement
on the relationship between flexible environmental policy and
technological innovation
Theoretically, stringent environment regulatory enforcement
can raise the possibilities of industrial enterprises punished for
environmental pollution (Fukuyama et al., 1996; Heyes, 2000).
Expected pollutant discharge fees will bring additional costs to
enterprises. As a result, industrial enterprises are forced to respond
to flexible environmental policy with technological innovation.
Furthermore, strict environment regulatory enforcement can
identify polluting enterprises, accurately obtain the discharge
amount of pollutants, and establish reasonable standards of
pollutant discharge fees (taxes), which helps to improve the accu-
racy of flexible environmental policy (Marquis and Bird, 2018; Sun
et al., 2019).
According to the empirical studies, strict environment regula-
tory enforcement can more completely discern the enterprises that
violate environmental policies, and subject them to severe pun-
ishment (Heyes, 1994; Pedersen, 2013; Liu et al., 2018a). Shimshack
and Ward (2008) found that strict environment regulatory
enforcement not only forces manufactures that disobey regulations
to comply with environmental policies, but also propels regulated
manufacturers to reduce the discharge amount of pollutants below
the government standards. Lin (2013) discovered that the discharge
amount of pollutants reported by the manufacture increases by
3.45% in the scenario of strict environment regulatory enforcement.
Zhang et al. (2018a) argued that environmental supervision of the
central government can strengthen the efficacy of environmental
policies of local governments. Earnhart and Glicksman (2015)
further proposed that both punitive environment regulatory
enforcement and cooperative environment regulatory enforcement
can promote the regulated to perform environmental management.
Sun et al. (2019) also pointed out that the effective implementation
of environmental laws and regulations reflects the environmental
governance ability of local governments. The stronger the ability,
the more can promote enterprises to fulfill their environmental
responsibilities. Therefore, the following hypothesis is proposed:
H5. The stricter environment regulatory enforcement, the greater
the impact of flexible environmental policy on technological
innovation, i.e. strict environment regulatory enforcement
strengthens the relationship between flexible environmental policy
and technological innovation while lax environment regulatory
enforcement weakens the relationship.
2.4.2. The moderating effect of environment regulatory enforcement
on the relationship between technological innovation and industrial
sustainable development
Generally, environmental legislation gives environmental reg-
ulators special powers to enter industrial premises or sites for in-
spection; they can issue or withdraw permits or “agree” to operate
industrial processes; they can regulate and enforce standards and, if
necessary, sue industrial polluters (Fineman, 2000). These in-
terventions can effectively affect the behavior of industrial enter-
prises, control pollutants below the standard through innovation,
environmental management and other means, and then enhance
the environmental compliance and legitimacy of enterprises (Liu
et al., 2018a; Sun et al., 2019). The contribution of technological
innovation to the industrial sustainable development lies in its can
improve the utilization efficiency of resource and energy in the
industrial production, decrease pollutant discharge, and thus
facilitate industrial sustainable development. However, according
to the empirical studies, because technological innovation may be
biased, production technological innovation may increase energy
consumption when improving financial performance and generate
5
“energy rebound effect” (Liu et al., 2018c). Droste et al. (2016)
asserted that innovation is more likely to achieve the goal of sus-
tainable economic growth with government intervention. To make
innovation drive industrial sustainable development, technological
innovation of industrial enterprises needs to have the dual attri-
butes of energy conservation and economic growth. In the cir-
cumstances, to respond to strict environment regulatory
enforcement, industrial enterprises will enhance the two attributes
of technological innovation to attenuate the bias of technological
innovation (Liu et al., 2018c). Therefore, the above arguments lead
to the following hypothesis:
H6. The stricter environment regulatory enforcement, the greater
the impact of technological innovation on sustainable develop-
ment, i.e. strict environment regulatory enforcement strengthens
the relationship between technological innovation and industrial
sustainable development while lax environment regulatory
enforcement weakens the relationship.
The theoretical model of this paper is presented as Fig. 1.
3. Research design
3.1. Model specification
Drawing on the method of testing mediating variables devel-
oped by Baron and Kenny (1986), this paper constructs the
following four econometric models to examine the dynamic
mechanism of China’s industrial sustainable development.
ln TIit ¼ a0 þ a1 ln FEPit þ a2 ln Controlit þ εit (1)
ln ISDit ¼ b0 þ b1 ln FEPit þ b2 ln Controlit þ εit (2)
ln ISDit ¼ c0 þ c1 ln TIit þ c2 ln Controlit þ εit (3)
ln ISDit ¼ d0 þ d1 ln FEPit þ d2 ln TIit þ d3 ln Controlit þ εit (4)
where FEP denotes flexible environmental policy, TI represents
technological innovation, ISD indicates industrial sustainable
development, Control denotes control variables. Eq. (1) examines
the link between flexible environmental policy and technological
innovation. Eq. (2) tests the relationship between flexible envi-
ronmental policy and industrial sustainable development. Eq. (3)
examines the link between technological innovation and indus-
trial sustainable development. If these three equations prove that
the first three hypotheses are true, Eq. (4) continues to be estimated
to investigate whether flexible environmental policy and techno-
logical innovation positively associate with industrial sustainable
development. When both d1 and d2 are significantly positive and d1
is smaller than b1 , there is a partial mediation. When d1 is not
significant, but d2 is significant, there is a full mediation.
Furthermore, the following econometric models are constructed
to examine the moderating effect of environment regulatory
enforcement.
ln TIit ¼ q0 þ q1 ln FEPit þ q2 ln ENFit þ q3 ln Controlit þ εit (5)
ln TIit ¼ g0 þ g1 ln FEPit þ g2 ln ENFit þ g3 ln FEPit  ln ENFit
þ g4 ln Controlit þ εit
(6)
where ENF denotes environment regulatory enforcement. Eq. (5)
tests the impacts of flexible environmental policy and environ-
ment regulatory enforcement on technological innovation.
6 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543

Environment regulatory
enforcement (ENF)

H5 + H6 +
H4 +
Flexible
Technological Industrial sustainable
environmental
innovation (TI) development (ISD)
policy (FEP) H2 + H3 +

H1 +
Fig. 1. Theoretical model.

FEP  ENF in Eq. (6) is the interaction term of flexible environmental

policy and environment regulatory enforcement, the coefficient of
which indicates whether the moderating effect of environment
1 Xm
S
i
regulatory enforcement is supported. minq ¼ k 
Since the moderating effect proposed by H6 takes effect after
m i¼1 xi0
the mediating effect, there is a moderated mediation. Following 
Wen et al. (2006), the econometric models are developed. 1 X s
Sþ
d
X
s S
p
1¼kþ ð þ Þ
sþr yd0 zp0
d¼1 d¼1
ln ISDit ¼ k0 þ k1 ln FEPit þ k2 ln ENFit þ k3 ln Controlit þ εit
(7)
X
n
kxi0 ¼ bj xij þ s
i ; i ¼ 1; 2; 3; :::; m
ln ISDit ¼ l0 þ l1 ln FEPit þ l2 ln ENFit þ l3 ln TIit j¼1

þ l4 ln Controlit þ εit (8) (10)

s:tf X
n

ln ISDit ¼ p0 þ p1 ln FEPit þ p2 ln ENFit þ p3 ln TIit þ p4 ln TIit

kyd0 ¼ bj ydj  sþ
d
; d ¼ 1; 2; 3; :::; s
j¼1
 ln ENFit þ p5 ln Controlit þ εit
(9)
X
n
If q1, q2 in Eq. (5), k1, k2 in Eq. (7), l3 in Eq. (8) are significant, the kzp0 ¼ bj zpj þ s
p ; p ¼ 1; 2; 3; :::; r
j¼1
mediating effect of technological innovation is verified. If p4 in Eq.
(9) is significant, environment regulatory enforcement moderates
the link between technological innovation and industrial sustain-
s þ 
i  0; sd  0; sp  0; bj  0; j ¼ 1; 2; 3; :::; n
able development.
It is assumed that the evaluated system has n decision-making
units (DMUs), where q represents the industrial sustainable
3.2. Variable selection and definition development value of the evaluated unit; m, s and r respectively
represent the number of types of input variables, desirable output
(1) Industrial sustainable development (ISD). Effectiveness that variables and undesirable output variables. The corresponding
can be expressed by the ratio of resource inputs to outputs is input vector can be expressed as: Xj ¼ ðx1j ; x2j ; x3j ; /; xmj ÞT , the
one of measures for industrial sustainable development. To desirable output vector can be expressed as:
lay emphasis on improving the utilization efficiency of re- Yj ¼ ðy1j ; y2j ; y3j ; /; ysj ÞT , and the undesirable output vector can be
þ 
sources and energy, reducing environmental costs and expressed as: Zj ¼ ðz1j ; z2j ; z3j ; /; zrj ÞT . s
i ; sd ; sp refer to slack vari-
increasing industrial green total factor productivity is the ables of input, desirable and undesirable output, respectively;
proper understanding of industrial sustainable development xij ; ydj ; zpj represent the ith input, the dth desirable output and the
(Chen and Golley, 2014; Müller et al., 2015; Caiado et al., pth undesirable output of the jth DMU, respectively. bj is the linear
2017; Hou et al., 2018; Feng and Wang, 2019). Therefore, programming coefficient.
this paper employs the SE-SBM-DEA model to calculate in-
dustrial sustainable development levels of China’s 30 prov- (2) Flexible environmental policy (FEP). Flexible environmental
inces, and the evaluation models are displayed as Eq. (10) policy internalizes the external costs of enterprises by means
(Tone, 2001; Zhou et al., 2018; Yang et al., 2018; Hou et al., of such tools as fees, taxes and emissions trading so that the
2018; Yuan, 2019). The input indicators include labor input, marginal private cost is equal to marginal social cost
capital input and comprehensive industrial energy con- (Ramanathan et al., 2018). Given that China’s pollutant
sumption, The desirable output indicator is total industrial charging system has long occupied an important position in
output value while undesirable output indicators comprise flexible environmental policy, this paper refers to the
industrial waste water, waste gas, solid waste, and CO2 (Liu method of Pan et al. (2019a), Xie et al. (2017), Guo et al.
et al., 2016; Yuan and Xiang, 2018; Lin and Chen, 2018). (2017), Chen et al. (2017), Cheng et al. (2017), Shen et al.
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543 7

(2019) and selects pollutant discharge fees of each province
as a proxy of flexible environmental policy.
(3) Technological innovation (TI). As the consumption of re-
sources and energy is a cost expenditure for enterprises, the
treatment of waste water, waste gas and solid waste also
needs to increase the cost expenditure. Therefore, for the
sake of cost saving, the technological innovation of industrial
enterprises should have the nature of energy saving and
emission reduction. At the same time, invention patents can
mirror the actual level of technological innovation (Pan et al.,
2019a; Yuan and Xiang, 2018). Based on this knowledge, the
number of industrial invention patent applications in each
province is used to measure technological innovation level.
(4) Environment regulatory enforcement (ENF). Based on the
discussions on the meaning of environment regulatory
enforcement among scholars like Heyes (1994), Heyes
(2000), Shimshack and Ward (2008), Lynch et al. (2019),
the number of cases of environmental administrative pun-
ishment decisions of the year in each province is a measure
of intensity of environment regulatory enforcement.
(5) Control variables. This paper tests the relationship between
flexible environmental policy, technological innovation and
industrial sustainable development through the mediating
effect model, and the research object is the industry of 30
provinces in China. Therefore, the selection of control vari-
ables should meet the impact on industrial technological
innovation and sustainable development simultaneously.
According to Chen and Golley (2014), Chen et al. (2017),
Cheng et al. (2017), Yuan and Xiang (2018), Yuan (2019), this
paper selects foreign direct investment (FDI), industrial scale
(SCAL), industrial R&D intensity (R&D), industrial capital
intensity (CAPI), industrial agglomeration degree (IAD) as
control variables. The definitions of variables are shown in
Table 1.
investment, are collected from China Statistical Yearbook. The data,
including pollutant discharge fees and the number of cases of
environmental administrative punishment decisions, comes from
China Environment Yearbook. The data on industrial energy con-
sumption of each region is obtained from China Energy Statistical
Yearbook. CO2 emission is calculated according to the method
mentioned in IPCC (Intergovernmental Panel on Climate Change)
Guidelines for National Greenhouse Gas Inventories. The descrip-
tive statistics of variables in the econometric regression model are
shown as Table 2 and the correlation coefficients of variables are
shown as Table 3.
4. Results and discussions
4.1. Unit root test
Industrial sustainable development (ISD), TI, FEP, ENF and
Control variables are panel data. Since non-stationary variables are
prone to lead to pseudo-regression problems in panel data
regression. Therefore, unit root test of variables is carried out first.
In this paper, we applied three methodsdLevin, Lin and Chu (LLC),
ADF-Fisher, PP-Fisherdto the unit root test. The unit root test
equation includes constant term and time trend term. The results
show that all variables are first-order stationary series (Table 4).
4.2. Mediation test
Table 5 reports the impact of flexible environmental policy on
industrial sustainable development and the estimation results on
the mediating effect of technological innovation. Jaffe and Palmer
(1997) argues that if the government can provide flexible envi-
ronmental policy to meet the needs of enterprises, then such
environmental policy can promote enterprise innovation and
competitiveness. At the same time, when the level of technological
innovation of industrial enterprises is high, the efficiency of energy

3.3. Data and descriptive statistics Table 2

Descriptive statistics of variables.

The industry panel data of 30 provincial-level administrative Variable Mean SD Min Max Observations
regions in 2006e2015 is adopted as the sample in this paper. We ISD 0.481 0.242 0.094 1.146 300
removed data for Tibet, Hong Kong, Macao and Taiwan, mainly TI 4143.260 8058.901 2.000 55624.000 300
because there was too much data missing. Discharge amount of FEP 59466.25 48805.92 1799.300 276863.700 300
industrial waste water, emissions of waste gas and discharge ENF 3558.150 5414.748 8.000 38434.000 300
FDI 2165.215 3474.866 14.130 18689.260 300
amount of solid waste in each region are from China Statistical
SCAL 6765.004 6146.628 217.550 30259.490 300
Yearbook on Environment. R&D investment, the number of inven- R&D 0.022 0.013 0.002 0.066 300
tion patent applications, fixed assets, total assets, the number of CAPI 0.581 0.090 0.308 0.921 300
labor force, total industrial output value, and foreign direct IAD 0.951 0.178 0.363 1.199 300

Table 1
The definitions of variables.

Variable name Measurement Unit

Industrial sustainable development
(ISD)
Technological innovation (TI)
Flexible environmental policy (FEP)
Environment regulatory
enforcement (ENF)
Foreign direct investment (FDI)
Industrial scale (SCAL)
Industrial R&D intensity (R&D)
Industrial capital intensity (CAPI)
Industrial agglomeration degree
(IAD)
Super-efficient SBM DEA model was used for calculation d
The number of industrial invention patent applications in each province Piece
The total amount of pollutant charges collected by each province 10,000 yuan
The number of environmental administrative penalty cases in each region Piece
Investments from large- and medium-sized foreign-funded enterprises, or Hong Kong, Macao and Taiwan of the 100 million
industry in each province yuan
The total industrial production value of each province 100 million
yuan
Each province’s industrial per capita R&D investment Yuan/Person
The total value of industrial fixed assets of each province divided by the total value of industrial assets d
The ratio of the industrial output value to the GDP of each province relative to the ratio of the industrial output value d
to the national GDP
8 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543

Table 3
Correlation coefficient of each variable.

Variable ISD TI FEP ENF FDI SCAL R&D CAPI IAD

ISD 1.000
TI 0.044 1.000
FEP 0.284*** 0.488*** 1.000
ENF 0.027 0.600*** 0.653*** 1.000
FDI 0.038 0.817*** 0.463*** 0.634*** 1.000
SCAL 0.220*** 0.855*** 0.769*** 0.728*** 0.826*** 1.000
R&D 0.152*** 0.789*** 0.243*** 0.477*** 0.702*** 0.558*** 1.000
CAPI 0.180*** 0.465*** 0.008 0.268*** 0.530*** 0.271*** 0.559*** 1.000
IAD 0.508*** 0.234*** 0.680*** 0.254*** 0.233*** 0.547*** 0.051 0.200*** 1.000

Note: ***, ** and * respectively indicate that the parameter estimation is significant at the levels of 0.01, 0.05 and 0.1.

Table 4
The results of unit root test.

Variable Test type LLC test ADF-Fisher test PP-Fisher test Conclusion

DlnISD (C, T, 1) 4.395*** 2.365* 0.908** first order stationary

DlnTI (C, T, 1) 12.243*** 13.243*** 6.594*** first order stationary
DlnFEP (C, T, 1) 7.053*** 2.040** 7.401*** first order stationary
DlnENF (C, T, 1) 7.995*** 0.062** 4.733*** first order stationary
DlnFDI (C, T, 1) 16.038*** 14.564*** 9.956*** first order stationary
DlnSCAL (C, T, 1) 2.828*** 3.148** 2.347* first order stationary
DlnR&D (C, T, 1) –14.923*** 14.264*** 1.635*** first order stationary
DlnCAPI (C, T, 1) 13.809*** 9.517*** 1.001*** first order stationary
DlnIAD (C, T, 1) 1.720** 2.795** 0.045* first order stationary

Note: C, T and N represent intercept term, trend term and lag period respectively. ***, ** and * respectively indicate that the parameter estimation is significant at the levels of
0.01, 0.05 and 0.1.

Table 5
The results of mediation test.

Technological innovation (lnTI) Industrial sustainable development (lnISD)

Variable Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)

_cons 5.258*** (11.43) 2.578*** (3.48) 3.251*** (17.58) 3.577*** (12.07) 2.890*** (9.74) 3.406*** (9.37)
lnINDEP(t-1) 0.453*** (19.78) 0.395*** (11.04) 0.400*** (14.34) 0.401*** (14.99) 0.384*** (15.94) 0.389*** (3.78)
lnFDI 0.147*** (4.64) 0.114*** (2.88) 0.214*** (14.90) 0.203*** (16.26) 0.211*** (12.57) 0.195*** (14.18)
lnSCAL 1.379*** (27.81) 1.565*** (20.95) 0.527*** (21.93) 0.492*** (15.52) 0.429*** (8.26) 0.316*** (4.64)
lnR&D 0.345*** (6.72) 0.404*** (7.01) 0.118*** (6.78) 0.126*** (5.37) 0.092*** (3.49) 0.076*** (3.56)
lnCAPI 0.147 (1.20) 0.070 (0.53) 0.397*** (6.38) 0.372*** (3.73) 0.418*** (7.12) 0.418*** (4.10)
lnIAD 1.490*** (6.99) 0.833** (2.29) 0.029 (0.27) 0.059 (0.24) 0.206 (1.59) 0.232 (0.81)
lnFEP 0.360*** (6.24) 0.056*** (3.78) 0.028** (2.24)
lnTI 0.048*** (2.76) 0.077*** (3.77)
AR(1) 3.740[0.00] 3.586[0.00] 2.229[0.03] 2.269[0.02] 2.215[0.03] 2.252[0.02]
AR(2) 1.280[0.20] 1.470[0.14] 1.112[0.27] 1.156[0.25] 1.003[0.32] 1.012[0.31]
Sargan c2 27.367[1.00] 25.995[1.00] 29.359[1.00] 28.891[1.00] 28.973[1.00] 28.145[1.00]
Wald c2 16053.43[0.00] 8227.51[0.00] 2419.22[0.00] 4360.65[0.00] 1586.80[0.00] 1472.67[0.00]
Observations 300 300 300 300 300 300

Notes: The z-statistic are in parentheses and the p value is in square brackets. ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.

saving and emission reduction will also be improved, which in turn
will promote the government to continuously optimize and adjust
the relevant environmental policy. Moreover, flexible environ-
mental policy can stimulate industrial enterprises to implement
energy conservation and emission reduction, which will also
reduce the cost and pressure of environmental law enforcement.
On the contrary, flexible environmental policy is easier to imple-
ment when environmental enforcement is stricter. Therefore, there
may be a reverse causal relationship between flexible environ-
mental policy, technological innovation, industrial sustainable
development and environmental regulatory enforcement, that is,
flexible environmental policy may have endogenous problem. An
effective way to solve the potential endogenous problem is to use
the instrument variable (IV) method. However, it is difficult to find
the appropriate instrumental variables. Thus, the GMM method can
be used to estimate the model. GMM methods include the first-
difference GMM and the system GMM, in which the estimation
results of, the system GMM are more effective, and the dynamic
effects can be investigated. To rule out the endogenous problem, we
use the sys-GMM method to estimate according to Yuan and Xiang
(2018), Lin and Chen (2018), Chen et al. (2018).
We perform AR test and Sargan test to ensure the validity of
estimated results. AR (1) and AR (2) aim to discern the autocorre-
lation of error terms. The Sargan test is a test of the validity of
instrumental variables. The serial correlation test results show that
the null hypothesis is rejected by AR (1) but accepted by AR (2). The
AR (2) is not significant, which confirms that second-order residuals
are irrelevant and the null hypothesis is supported. The results of
Sargan test disclose that it accepts the null hypothesis, demon-
strating that overidentifying restrictions of instrumental variables
are valid. Moreover, c2 (1) statistics in White test and BP test reject
the hypothesis of homoscedasticity in favor of heteroscedasticity so
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543
Table 6
The results of Sobel test, Zmediation test and Freedman test.
mediation c dc c’ dc’
lnTI 0.056 0.025 0.28 0.028
Note: (1) c is the direct effect of FEP on ISD, c’ is the indirect effect of FEP on ISD after introducing mediation variable, a is the regression coefficient of FEP on TI, b is the
regression coefficient of FEP and TI on ISD, dc, dc’, da, db are the standard deviation of the regression coefficient, rxm is the covariance of FEP and TI.(2) Zsobel ¼ qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi,
a b

da db
Zmediation ¼ sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi, tN2 ¼ rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
a b d2c þ d2c’  2  dc  dc’  1  r2xm
ð Þ2 þ ð Þ2 þ 1
da db
that this paper takes the logarithm of variables to eliminate the
heteroscedasticity.
Model (1) in Table 5 shows that the coefficient of one lag of
technological innovation is 0.453, significant at 1% level, indicating
that China’s industry technological innovation has a strong and
positive cumulative effect. The coefficient of FDI is 0.147 at 1%
significance level, meaning that foreign direct investment signifi-
cantly inhibits industry technological innovation. The primary
cause is that foreign-invested enterprises capitalize on cheap fac-
tors in China such as the workforce, resources and energy to boost
economic performance, rather than driving Chinese enterprises to
improve their technological innovation capabilities. The coefficient
of industrial scale is 1.379, significant at 1% level, implying that the
expansion of industrial scale can significantly promote technolog-
ical innovation. The coefficient of industrial R&D intensity is 0.345,
at 1% significance level, suggesting that strengthening R&D in-
tensity is an important path to foster technological innovation.
Industrial capital intensity has a positive but insignificant impact
on technological innovation. The coefficient of industrial agglom-
eration degree is 1.490, significant at 1% level, demonstrating that
for current industrial agglomeration, collaborative innovation has
not yet generated prevalently.
As Model (2) shows, controlling for the effects of other vari-
ables, the coefficient of flexible environmental policy is 0.360,
significant at 1% level, indicating that flexible environmental
policy has a positive and significant effect on industry techno-
logical innovation. H2 is supported. This is basically consistent
with the conclusions of Li et al. (2018) and Fabrizi et al. (2018).
Meanwhile, it also corroborates the “weak” Porter’s hypothesis
and the narrow Porter’s hypothesis (Jaffe and Palmer, 1997). In
Model (3), industrial scale and R&D intensity play significantly
positive roles in industrial sustainable development, whereas FDI
and capital intensity significantly inhibit it. After control variables
are included into the regression equations, Model (4) estimates
the impact of flexible environmental policy on industrial sus-
tainable development. The coefficient of flexible environmental
policy is 0.056, significant at 1% level, which shows that flexible
environmental policy exerts positive and significant impact on
industrial sustainable development. H1 is also verified. This not
only underpins the “narrow” and “strong” Porter hypothesis (Jaffe
and Palmer, 1997), but also provides evidence for the importance
of innovation and research on environmental protection and
market mechanism underscored in the current industrial sus-
tainable development field. In Model (5), the coefficient of tech-
nological innovation is 0.048, significant at 1% level, implying that
technological innovation can significantly facilitate industrial
sustainable development. H3 is evidenced.
Finally, Model (6) examines the impacts of flexible environ-
mental policy and technological innovation on industrial sus-
tainable development. The coefficient of technological innovation
is 0.077, at 1% significance level. The coefficient of flexible
9
a da b db rxm Sobel test (Z) Zmediation test (Z) Freedman test (tn-2)
0.36 0.058 0.077 0.021 0.88 3.157*** 3.127*** 8.212***
ab
a2 d2b þ b2 d2a
ðc  c’Þ
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi. (3) ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.
environmental policy is also significantly positive, but it is less
than the corresponding coefficient in Model (4). The above results
reveal that technological innovation plays a partial mediating role
in the link between flexible environmental policy and industrial
sustainable development, and H4 is thus corroborated. Further
calculations show that the mediating effect of technological
innovation is 0.0277 (0.360  0.077), accounting for 49.5% of the
total effect (0.0277/0.056), that is, 1% increase in flexible envi-
ronmental policy will engender the increase of 0.0277 units in
industrial sustainable development through technological
innovation.
In addition, we use Sobel test (Sobel, 1982), Zmediation test
(Iacobucci, 2012) and Freedman test (Freedman and Schatzkin,
1992) to further examine the mediating effect of technological
innovation. The results show that all three test values are signifi-
cant at 1% level, proving that the mediating effect does exist
(Table 6).
4.3. Moderation test
The test on the moderating effect of environment regulatory
enforcement includes two steps. The first step is to examine the
moderating effect on the relationship between flexible environ-
mental policy and technological innovation. The second step is to
examine the moderating effect on the relationship between tech-
nological innovation and industrial sustainable development.
Table 7 reports the results.
Model (2) in Table 5 shows that flexible environmental policy is
significantly and positively related to technological innovation.
Model (7) in Table 7 implies that flexible environmental policy and
environment regulatory enforcement have significantly positive
impacts on technological innovation, and the coefficients of them
are 0.195, 0.073, respectively, both significant at 1% level. In Model
(8), the coefficient of the interaction term of flexible environmental
policy and environment regulatory enforcement is 0.034, signifi-
cant at 1% level, indicating that environment regulatory enforce-
ment moderates the relationship between flexible environmental
policy and technological innovation. H5 is thus supported. This
finding is congruent with the arguments of Earnhart and Glicksman
(2015) and Zhang et al. (2018a) who have found that stringent
environment regulatory enforcement can augment the effective-
ness of environmental policies.
According to the method recommended by Wen et al. (2006),
this paper further conducts the testing for the moderated media-
tion model. First, Model (9) examines the impacts of flexible
environmental policy and environment regulatory enforcement on
industrial sustainable development. The coefficient of flexible
environmental policy is 0.114, significant at 1% level. Second, Model
(7) shows the regression results on the impacts of flexible envi-
ronmental policy and environment regulatory enforcement on
technological innovation. It can be observed that flexible
10 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543

Table 7
The results of moderation test of environment regulatory enforcement.

Technological innovation (lnTI) Industrial sustainable development (lnISD)

Variable Model (7) Model (8) Model (9) Model (10) Model (11)

_cons 3.251***(-4.58) 3.452***(-3.75) 3.480***(-10.43) 3.432***(-10.34) 3.481***(-8.07)

lnINDEP(t-1) 0.411***(10.28) 0.374***(8.88) 0.385***(12.51) 0.364***(12.18) 0.369***(8.14)
lnFDI 0.145***(-3.97) 0.123***(-3.27) 0.193***(-8.33) 0.195***(-9.29) 0.210***(-5.80)
lnSCAL 1.515***(19.68) 1.567***(19.17) 0.479***(10.81) 0.296***(5.70) 0.299***(5.41)
lnR&D 0.405***(7.28) 0.419***(5.62) 0.131***(6.82) 0.066***(2.85) 0.071***(3.48)
lnCAPI 0.105 (0.58) 0.046(0.28) 0.395***(-4.68) 0.429***(-4.51) 0.371***(-4.28)
lnIAD 1.101***(-3.78) 1.365***(-3.55) 0.122(0.46) 0.273(0.84) 0.174(0.72)
lnFEP 0.195***(4.63) 0.217***(3.98) 0.114***(3.77) 0.098***(4.36) 0.043**(2.04)
lnENF 0.073***(3.41) 0.053***(3.08) 0.012*(1.76) 0.024***(2.94) 0.018*(1.67)
lnFEP  lnENF 0.034***(4.56)
lnTI 0.086***(5.62) 0.086***(5.42)
lnTI  lnENF 0.007 (1.21)
AR(1) 3.447[0.00] 3.356[0.00] 2.223[0.03] 2.183[0.03] 2.206[0.03]
AR(2) 1.323[0.19] 1.171[0.24] 1.116[0.26] 0.908[0.36] 0.965[0.33]
Sargan c2 16.317[1.00] 25.225[1.00] 27.581[1.00] 26.862[1.00] 25.999[1.00]
Wald c2 8955.01[0.00] 11406.45[0.00] 1441.75[0.00] 2703.40[0.00] 3174.90[0.00]
Observations 300 300 300 300 300

Notes: The z-statistic are in parentheses and the p value is in square brackets. ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.

environmental policy can significantly promote technological
innovation. Third, the impacts of flexible environmental policy,
environment regulatory enforcement and technological innovation
on industrial sustainable development are analyzed. In Model (10),
the coefficient of technological innovation is 0.086, at 1% signifi-
cance level. All of these demonstrate a significant mediation of
technological innovation. Finally, Model (11) presents the results
concerning the impacts of flexible environmental policy, environ-
ment regulatory enforcement, technological innovation and the
interaction term of technological innovation and environment
regulatory enforcement on industrial sustainable development. The
coefficient of the interaction term is 0.007, positive but not signif-
icant, suggesting that environment regulatory enforcement does
not moderate the relation between technological innovation and
industrial sustainable development, and H6 is not supported.
In sum, environment regulatory enforcement merely produces a
positive moderating impact on the relation between flexible envi-
ronmental policy and technological innovation but not on the
relation between technological innovation and industrial sustain-
able development, which manifests that Chinese local govern-
ments’ environment regulatory enforcement is still far from
adequate and effective, and an “implementation gap” exists (Allen
et al., 2005; Tang et al., 2010). The reason why the moderation of
environment regulatory enforcement is not significant in the rela-
tion between technological innovation and industrial sustainable
development lies in that local governments can exercise the
discretion of environment regulatory enforcement to protect
polluting enterprises, resulting in these enterprises lacking in-
centives to engage in technological innovation that is energy-
saving and environment-friendly. To supercharge local economic
growth at the price of ecological environment hinders industrial
sustainable development. Besides, local governments have obvious
information advantages in environmental protection affairs. Since
environmental protection is closely related to other local govern-
ments’ affairs, local governments have a tendency to attenuate
environmental law enforcement. Lax environment regulatory
enforcement helps create a friendly business environment, which
attracts heavy chemical enterprises with high yields (Qi and Zhang,
2014; Sjo €berg, 2016) but reduces green technologies and impairs
industrial sustainable development. Furthermore, regarding the
administrative system, local environmental protection bureaus
(EPBs) are supervised by the central government and the local
governments, including chief appointment and financial support
(Tang et al., 2010). Consequently, local EPBs, biased toward eco-
nomic development requested by local governments, are lax in
regulatory enforcement to cope with polluting behaviors of in-
dustrial enterprises. Formalistic and supernatant, regulatory
enforcement cannot curb polluting behaviors and force enterprises
to conduct green technological innovation (Zhang et al., 2018a). In
addition, stringent environment regulatory enforcement increases
the expected financial burden on polluters, which will cause
polluting enterprises to exert greater political pressure on the
governments in anticipation of reducing or abandoning techno-
logical innovation, thereby leading to more discharged pollutants
(Cheng and Lai, 2012).
4.4. Regional heterogeneity analysis
Due to the obvious differences in the level of economic devel-
opment, resource endowment and the construction of environ-
mental protection mechanism among different regions in China,
this paper further divides the 30 provinces into eastern, central and
western regions1 to analyze regional heterogeneity. Because the
number of samples in each region becomes smaller after grouping,
this paper uses the panel fixed effect model or random effect model
to test, and which model is determined by Hausman test.
4.4.1. The results of eastern region
First of all, the mediating effect is tested. Model (1) in Table 8
shows that the coefficient of FDI is 1.062, at 1% significance level,
meaning that the introduction of FDI in the eastern region can
significantly promote industry technological innovation. The coef-
ficient of industrial scale is 1.251, significant at 1% level, implying
that the expansion of industrial scale is helpful to provide financial
support for enterprise innovation. The coefficient of R&D is 0.816, at
1% significance level, suggesting that increasing R&D input can
effectively promote industry technological innovation. On the
contrary, industrial agglomeration degree has a significant inhibi-
tory effect on technological innovation, which may be due to the
fact that industrial agglomeration is only manifested in the
1
The eastern region includes Beijing, Tianjin, Liaoning, Shanghai, Jiangsu, Zhe-
jiang, Shandong, Fujian, Guangdong, Hainan and Hebei; the central region covers
Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hunan and Hubei; Inner
Mongolia, Guangxi, Sichuan, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Xinjiang,
Ningxia and Chongqing are encompassed in the western region.
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543 11

improvement of the industrial chain, but insufficient in the devel-

11.042***(-5.44)

1.031***(-3.67)
opment of circular economy.

0.704*(-1.87)
1.738***(4.87)

0.901(-1.59)
As Model (2) shows, the coefficient of flexible environmental

0.353**(2.60)

0.198**(2.15)
0.237**(2.27)
0.067**(2.24)

0.012(0.84)
Model (11)
policy is 0.200, at 5% significance level, indicating that flexible

13.72***

26.03***
environmental policy can significantly promote industrial techno-
Industrial sustainable development (lnISD)

0.58

110
FE logical innovation. H2 is verified in the eastern region. In Model (3),
industrial scale and R&D play a significant role in promoting in-
10.196***(-5.79)

1.024***(-3.65)
0.785**(-2.16)
dustrial sustainable development. On the contrary, FDI and indus-
1.687***(4.80)
0.386***(2.97)

0.918(-1.63)
0.207**(2.27)
0.198**(2.12)
0.061**(2.13)
trial capital intensity have a significant inhibitory effect on
Model (10)

industrial sustainable development. After control variables are

15.40***

35.30***
included into the regression equations, as Model (4) shows that the

0.58

110
FE

coefficient of flexible environmental policy is 0.251, significant at

1% level. H1 is also verified in the eastern region. In Model (5), the
8.999***(-5.30)
1.028***(-2.93)

1.052***(-3.69)
1.466***(4.29)

0.246***(2.71)
0.719(-1.27)

coefficient of technological innovation is 0.252, at 1% significance

0.213**(2.06)

0.071**(2.31)
Model (9)

level, implying that technological innovation can effectively pro-

16.33***

36.70***
mote the sustainable development of regional industry. H3 is evi-
0.55

110
denced in the eastern region. Model (6) shows that the coefficient
FE

of technological innovation 0.208, significant at 5% level. Moreover,

6.216***(-3.38)

1.097*(-1.78)

the coefficient of flexible environmental policy is also significantly

1.164***(3.05)
1.172***(3.16)
0.800***(6.72)

0.098**(2.52)
Technological innovation (lnTI)

0.167*(1.67)

0.066*(1.71)
0.073(0.23)

positive, but it is less than the corresponding value in Model (4).

Model (8)

164.32***

The above results show that technological innovation plays a partial

19.76**

mediating role between flexible environmental policy and indus-

0.94

110
FE

trial sustainable development. H4 is verified in the eastern region.

Moderation effect

6.035***(-3.25)

Further calculations show that the mediating effect of technological

1.224***(3.19)
1.116***(2.99)
0.870***(7.70)

0.053***(2.89)
1.003(-1.62)
0.196*(1.98)

innovation is 0.0416, accounting for 16.6% of the total effect.

0.138(0.44)
Model (7)

183.51***

Secondly, the moderate effect is tested. Model (2) in Table 8

14.75*

shows that flexible environmental policy plays a significant role

0.93

110
FE

in promoting technological innovation. Combined with Model (7),

it is found that flexible environmental policy and environmental
9.336***(-5.87)

0.934***(-3.47)
0.735**(-2.04)
1.636***(4.69)
0.442***(3.68)

0.934(-1.65)

regulatory enforcement have significant promoting effects on

0.209**(2.29)
0.208**(2.23)
Model (6)

technological innovation, with coefficients of 0.196 and 0.053,

17.36***

41.80***

respectively. In Model (8), the coefficient of the interaction term

Notes: The t-statistic are in parentheses. ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.
0.57

110

between flexible environmental policy and environmental regula-

FE

tory enforcement is 0.066, significant at 10% level, indicating that

7.633***(-5.31)

0.774***(-2.91)

environment regulatory enforcement moderates the relationship

1.608***(4.51)
0.490***(4.05)

0.252***(2.70)
0.554(-1.54)

0.654(-1.16)

between flexible environmental policy and technological innova-

Model (5)

18.53***

41.74***

tion. H5 is thus supported in the eastern region. This paper further

Industrial sustainable development (lnISD)

0.54

conducts the testing for the moderated mediation model. Accord-

110
FE

ing to the results of Models (9), (7), (10), the mediating effect of
7.910***(-5.32)
0.983***(-2.80)

0.947***(-3.45)

technological innovation is significant. Model (11) shows that the

1.392***(4.12)
0.270***(2.87)

0.251***(2.75)
0.726(-1.28)

coefficient of the interaction term is 0.012 but not significant,

Model (4)

suggesting that environment regulatory enforcement does not

18.63***

42.03***

moderate the relation between technological innovation and in-

0.55

110
FE

dustrial sustainable development. H6 is not verified in the eastern

region.
5.403***(-4.45)

0.749***(-2.73)
0.822**(-2.30)
1.292***(3.72)
0.285***(2.93)

0.321(-0.56)
Model (3)

4.4.2. The results of central region

19.48***

41.89***

Model (1) in Table 9 shows that the coefficient of FDI is 0.358,

0.51

110

significant at 5% level, indicating that the introduction of FDI in the

FE

central region can significantly promote technological innovation.

6.849***(-4.24)

The coefficient of industrial scale is 2.081, at 1% significance level,

1.190***(3.12)
1.172***(3.18)
0.828***(8.08)

0.997(-1.61)
0.200**(2.02)
Technological innovation (lnTI)

0.060(0.20)

implying that the expansion of industrial scale is helpful to tech-

Model (2)

214.42***

19.79***

nological innovation. The coefficient of R&D is 0.481, significant at

0.93

1% level, meaning that increasing R&D input can effectively pro-

110
FE

mote industry technological innovation. On the contrary, industrial

8.848***(-6.82)
Mediation effect

1.321**(-2.17)
Test results in the eastern region.

agglomeration degree has a significant inhibitory effect on tech-

1.062***(2.78)
1.251***(3.37)
0.816***(7.86)
0.098(-0.33)

nological innovation.
Model (1)

248.38***

As Model (2) shows that the coefficient of flexible environ-

22.29***

mental policy is 0.080 but not significant. According to Baron and

0.93

110
FE

Kenny (1986), the discussion of mediating effect terminates when

lnFEP  lnENF

the coefficient of independent variable to dependent variable is not

Observations
lnTI  lnENF

significant. Therefore, the mediating effect of technological inno-

Hausman
Variables

vation in the central region does not exist. In addition, Model (5)
lnSCAL

lnCAPI
lnR&D

lnENF
_cons

lnIAD
lnFEP
Table 8

lnFDI

lnTI

shows that technological innovation has a significant inhibitory

R2
F

effect on industrial sustainable development, indicating that

12 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543

Table 9
Test results in the central region.

Variables Mediation effect Moderation effect

Technological innovation Industrial sustainable development (lnISD) Technological innovation Industrial sustainable development
(lnTI) (lnTI) (lnISD)

Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7) Model (8) Model (9) Model (10) Model (11)

RE RE RE RE RE FE FE FE FE FE FE

_cons 11.463*** 11.804*** 3.574*** 2.844** 6.351*** 5.876*** 12.602*** 12.608*** 2.755** 5.503*** 5.525***
(7.19) (6.27) (3.70) (2.51) (5.35) (4.33) (6.29) (6.26) (2.38) (4.01) (3.97)
lnFDI 0.358** 0.352** 0.331*** 0.330*** 0.271*** 0.275** 0.292 (1.44) 0.300 (1.46) 0.290** 0.227** 0.224*
(2.05) (2.02) (3.07) (3.07) (2.64) (2.56) (2.47) (2.03) (1.96)
lnSCAL 2.081*** 2.051*** 0.655*** 0.709*** 1.157*** 1.215*** 2.182*** 2.160*** 0.645*** 1.121*** 1.119***
(9.19) (8.93) (4.68) (5.03) (6.13) (6.18) (8.14) (7.93) (4.16) (5.45) (5.38)
lnR&D 0.481*** 0.531*** 0.263*** 0.197* (1.79)0.360*** 0.307*** 0.442** 0.446** 0.220* (1.94) 0.317*** 0.319***
(2.83) (2.85) (2.61) (3.73) (2.77) (2.25) (2.26) (2.88) (2.84)
lnCAPI 0.482 0.444 0.868*** 0.915*** 0.979*** 1.016*** 0.492 0.502 0.890*** 0.997*** 0.999***
(1.52) (1.35) (4.64) (4.90) (5.62) (5.59) (1.50) (1.51) (4.68) (5.52) (5.38)
lnIAD 1.707*** 1.733*** 0.247 (0.75) 0.271 (0.83) 0.183 0.186 1.897*** 1.875*** 0.351 (1.02) 0.063 0.072
(3.13) (3.13) (0.56) (0.55) (3.18) (3.12) (0.18) (0.20)
lnFEP 0.080 (0.50) 0.136 0.106 0.074 (0.40) 0.079 (0.43) 0.135 0.119 0.117
(1.34) (1.06) (1.27) (1.20) (1.15)
lnTI 0.226*** 0.229*** 0.218*** 0.219***
(3.48) (3.41) (3.26) (3.23)
lnENF 0.036 0.022 0.039* (1.68) 0.032 (1.44) 0.033 (1.29)
(0.88) (0.45)
lnFEP  lnENF 0.033
(0.56)
lnTI  lnENF 0.003
(0.13)
F/Wald c2 1173.39*** 1132.38*** 191.46*** 202.96*** 243.59*** 33.65*** 163.57*** 141.63*** 28.72*** 30.18*** 26.41***
R2 0.95 0.95 0.74 0.74 0.78 0.78 0.95 0.95 0.76 0.79 0.79
Hausman 5.20 7.91 3.88 2.11 2.69 59.25*** 49.60*** 48.87*** 57.41*** 58.66*** 57.79***
Observations 80 80 80 80 80 80 80 80 80 80 80

Notes: The t-statistic and z-statistic are in parentheses. ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.

technological innovation in the central region not only promotes
economic development, but also produces more energy con-
sumption and environmental pollution. H1, H2, H3, H4 are not
verified in the central region.
Models (2), (7), (8) in Table 9 show that the impact of flexible
environmental policy and environmental regulatory enforcement
on technological innovation are not significant, and the interaction
term between flexible environmental policy and environmental
regulatory enforcement has a non-significant negative impact,
implying that the quality of environmental regulatory enforcement
in the central region is not high. In addition to the collection of
sewage charges and emissions trading, environmental subsidies
and other policy instruments are not perfect, it is difficult for
environmental policies to promote technological innovation. H5 is
not supported in the central region. According to Models (9), (7),
(10), (11), environmental regulatory enforcement does not play an
important role in the relationship between technological innova-
tion and industrial sustainable development. H6 is not evidenced in
the central region.
4.4.3. The results of western region
Model (1) in Table 10 shows that the coefficient of FDI is 0.085
but not significant, indicating that the “cleaner” FDI introduced in
the western region is low and the governments pay more attention
to promoting local economy development. The coefficient of in-
dustrial scale is 2.114, significant at 1% level, meaning that the
expansion of industrial scale is helpful to provide financial support
for innovation. The coefficient of R&D is 0.700, at 1% significance
level, which is 0.116 units lower than that in the eastern region, but
0.219 units higher than that in the central region. The coefficient of
industrial agglomeration degree is 1.216, significant at 5% level,
which the inhibitory effect is lower 0.105 and 0.491 units
respectively compared with the eastern and western regions,
implying that the industrial agglomeration in the western region
has not yet produced well innovation spillover effect.
Model (2) shows that the coefficient of flexible environmental
policy is 0.496, at 1% significance level, indicating that flexible
environmental policy can significantly promote industrial techno-
logical innovation. H2 is verified in the western region. In Model
(3), industrial scale plays a significant role in promoting industrial
sustainable development. On the contrary, FDI has a significant
inhibitory effect on industrial sustainable development. After
control variables are included into the regression equations, Model
(4) estimates the impact of flexible environmental policy on in-
dustrial sustainable development. The coefficient of flexible envi-
ronmental policy is 0.246, significant at 5% level. H1 is supported in
the western region. In Model (5), the coefficient of technological
innovation is 0.154, significant at 5% level, indicating that techno-
logical innovation can effectively promote the industrial sustain-
able development. H3 is evidenced in the western region. Model (6)
shows that the coefficient of technological innovation is 0.118, at
10% significance level. The coefficient of flexible environmental
policy is also significantly positive, but it is less than the corre-
sponding value in Model (4). The above results reveal that tech-
nological innovation plays a partial mediating role in the link
between flexible environmental policy and industrial sustainable
development, and H4 is thus corroborated. Further calculations
show that the mediating effect of technological innovation is
0.0485, accounting for 23.8% of the total effect. Compared with the
eastern region, the mediating effect in the western region is 7.2
percentage points higher.
Models (2), (7), (8) in Table 10 imply that the impact of envi-
ronmental regulatory enforcement on technological innovation is
not significant, and the interaction term of flexible environmental
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543 13

Table 10
Test results in the western region.

Variables Mediation effect Moderation effect

Technological innovation Industrial sustainable development (lnISD) Technological innovation Industrial sustainable development
(lnTI) (lnTI) (lnISD)

Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7) Model (8) Model (9) Model (10) Model (11)

FE FE FE FE FE FE FE FE FE FE FE

_cons 7.027*** 3.266* 3.632*** 5.497*** 4.714*** 5.881*** 3.212* 4.164** 6.143*** 6.510*** 6.955***
(4.42) (1.88) (4.46) (5.02) (5.21) (5.33) (1.81) (2.03) (5.76) (6.08) (5.67)
lnFDI 0.085 0.035 0.160** 0.185** 0.173** 0.189*** 0.036 0.034 0.164** 0.168** 0.184**
(0.74) (0.31) (2.25) (2.64) (2.49) (2.73) (0.32) (0.30) (2.43) (2.52) (2.62)
lnSCAL 2.114*** 2.253*** 0.539*** 0.470*** 0.864*** 0.736*** 2.253*** 2.245*** 0.473*** 0.730*** 0.735***
(14.04) (14.96) (5.78) (4.95) (5.41) (4.24) (14.88) (14.80) (5.21) (4.42) (4.43)
lnR&D 0.700*** 0.696*** 0.148 (1.50) 0.150 (1.57) 0.255** 0.232** 0.701*** 0.662*** 0.093 (1.00) 0.173* (1.71) 0.142 (1.30)
(4.42) (4.60) (2.43) (2.22) (4.52) (4.12)
lnCAPI 0.207 0.115 0.422 0.468 0.454 0.482 0.107 0.066 0.554* 0.566* 0.542
(0.37) (0.21) (1.20) (1.37) (1.33) (1.42) (0.20) (0.12) (1.69) (1.75) (1.66)
lnIAD 1.216** 1.583*** 0.163 0.018 (0.05) 0.350 0.168 1.576*** 1.502** 0.056 0.236 0.268
(2.01) (2.68) (0.44) (0.94) (0.44) (2.65) (2.50) (0.16) (0.65) (0.73)
lnFEP 0.496*** 0.246** 0.187* (1.81) 0.491*** 0.426** 0.189* (1.95) 0.133 (1.32) 0.160 (1.50)
(3.14) (2.46) (3.04) (2.42)
lnTI 0.154** 0.118* (1.82) 0.114* (1.86) 0.112* (1.80)
(2.47)
lnENF 0.010 0.013 (0.20) 0.120*** 0.118*** 0.127***
(0.16) (3.18) (3.19) (3.26)
lnFEP  lnENF 0.041 (0.93)
lnTI  lnENF 0.015 (0.75)
F/Wald c2 147.21*** 135.84*** 15.24*** 14.39*** 14.41*** 13.12*** 115.22*** 100.77*** 14.99*** 13.90*** 12.35***
R2 0.89 0.90 0.45 0.48 0.48 0.50 0.90 0.90 0.53 0.55 0.55
Hausman 48.50*** 42.11*** 29.84*** 30.91*** 32.80*** 31.60*** 36.07*** 38.08*** 30.84*** 30.02*** 35.37***
Observations 110 110 110 110 110 110 110 110 110 110 110

Notes: The t-statistic are in parentheses. ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.

policy and environmental regulatory enforcement has a non-
significant positive impact on technological innovation, indicating
that environmental regulatory enforcement in the western region
has a potential tendency to positively moderate flexible environ-
mental policy to promote technological innovation, but only
because of the low quality of environmental regulatory enforce-
ment, the regulatory effect is not significant. H5 is not supported in
the western region. In Models (9), (7), (10), (11), environmental
regulatory enforcement does not play an important role in the
relationship between technological innovation and industrial sus-
tainable development, and H6 is not verified in the western region.
4.5. Robustness test
To further corroborate the robustness of empirical results, this
paper uses the total number of patent applications to measure
technological innovation, investments in environment components
for new construction projects to measure environment regulatory
enforcement. In light of the method of Vo (2010), the 2SLS is
adopted for regression, and one lag of endogenous explanatory
variable is the instrumental variable (IV). As Table 11 shows, despite
the differences of several control variables, the magnitude and
significance of the coefficients of key variables are similar to the
prior regression results, indicating that the empirical results of this
paper are robust and reliable.
5. Conclusions and policy implications
5.1. Conclusions
With the increasing downward pressure of China’s industrial
economy and increasingly tight constraints of resources and envi-
ronment, it has become an important issue concerned by the
government and academia that how to realize the China’s industrial
sustainable development. This paper takes technology innovation
as the mediator, and uses environmental regulatory enforcement as
the moderator to construct a driving mechanism that flexible
environmental policy affects sustainable development. Meanwhile,
this paper uses the data of 30 provincial industrial panel in China
from 2006 to 2015, and implies the sys-GMM method to carry out
the empirical test. Further, the regional heterogeneity effect is
analyzed. This paper draws the conclusions as below:
(1) Flexible environmental policy is beneficial for China’s in-
dustrial sustainable development. This underpins the “nar-
row” and “strong” Porter hypothesis. (2) Flexible
environmental policy has a significantly positive impact on
technological innovation. Meanwhile, technological innova-
tion is significantly and positively related to industrial sus-
tainable development, and technological innovation partially
mediates the relationship between flexible environmental
policy and industrial sustainable development. With respect
to the magnitude of mediating effect, technological innova-
tion makes 49.5 percent of contribution to the positive
impact of flexible environmental policy on industrial sus-
tainable development. (3) Environment regulatory enforce-
ment positively moderates the relationship between flexible
environmental policy and technological innovation, i.e. the
positive impact of flexible environmental policy on techno-
logical innovation is strengthened when environmental
regulatory enforcement is stringent, suggesting that
enhanced environment regulatory enforcement helps to
implement flexible environmental policy. However, it has a
potentially positive but not significant moderating impact on
the relationship between technological innovation and in-
dustrial sustainable development. (4) From a regional point
of view, technological innovation has partly mediating ef-
fects between flexible environmental policy and industrial
14 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543

Table 11
The results of robust test.

Variables Mediation effect Moderation effect

Technological innovation Industrial sustainable development (lnISD) Technological innovation Industrial sustainable development
(lnTI) (lnTI) (lnISD)

Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7) Model (8) Model (9) Model (10) Model (11)

_cons 0.210 0.149 0.510* 0.140 0.526* 0.150 0.071 0.041 0.088 0.090 0.090
(0.55) (0.41) (1.66) (0.44) (1.72) (0.48) (0.18) (0.10) (0.26) (0.26) (0.26)
lnINDEP(t-1) 0.786*** 0.783*** 0.881*** 0.870*** 0.880*** 0.870*** 0.778*** 0.774*** 0.868*** 0.868*** 0.869***
(27.09) (25.95) (18.32) (18.14) (18.35) (18.15) (23.85) (22.71) (17.94) (17.86) (17.97)
lnFDI 0.022* 0.025* 0.034* 0.053** 0.033** 0.053** 0.025** 0.032* 0.053*** 0.053** 0.059**
(1.86) (1.95) (1.67) (2.31) (2.57) (2.17) (1.98) (1.76) (2.32) (2.19) (2.34)
lnSCAL 0.296*** 0.312*** 0.057* 0.139*** 0.040* (1.81)
0.132** 0.309*** 0.325*** 0.131*** 0.130** 0.147**
(5.68) (4.75) (1.79) (3.21) (2.07) (4.73) (4.78) (2.88) (2.04) (2.17)
lnR&D 0.103** 0.105** 0.029* 0.040* (1.78)0.041** 0.044** 0.111** 0.120** 0.040** 0.041** 0.034* (1.90)
(1.98) (2.05) (1.90) (2.06) (2.19) (2.11) (2.32) (2.30) (2.07)
lnCAPI 0.366*** 0.367*** 0.169 0.164 0.159 0.161 0.361*** 0.372*** 0.157 0.157 0.157
(2.90) (2.90) (1.34) (1.32) (1.26) (1.27) (2.90) (2.95) (1.28) (1.25) (1.25)
lnIAD 0.312*** 0.302*** 0.159 (1.08) 0.261 (1.63) 0.173 (1.18) 0.265* (1.69) 0.299*** 0.303*** 0.269* (1.66) 0.270* (1.70) 0.252 (1.59)
(3.06) (2.99) (2.95) (2.94)
lnFEP 0.130** 0.092*** 0.085*** 0.016** 0.021*** 0.094*** 0.093*** 0.094***
(2.47) (3.32) (3.12) (2.57) (2.75) (3.29) (3.03) (3.05)
lnTI 0.012** 0.056** 0.001** 0.008**
(2.46) (2.19) (2.03) (2.28)
lnENF 0.013** 0.011** 0.012* (1.69) 0.011** 0.008**
(2.47) (2.37) (2.57) (2.37)
lnFEP  lnENF 0.010***
(2.62)
lnTI  lnENF 0.007 (1.14)
Wald c2 8565.97 8644.07 1550.60 1605.43 1575.52 1612.06 8619.55 9338.42 1606.88 1608.56 1630.76
[0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
R2 0.975 0.975 0.805 0.809 0.806 0.809 0.975 0.976 0.809 0.809 0.810
Observations 300 300 300 300 300 300 300 300 300 300 300

Notes: The z-statistic are in parentheses and the p value is in square brackets. ***, **, and * indicate significance at the 1, 5, and 10% levels, respectively.

sustainable development in the eastern and western regions,
and environmental regulatory enforcement can positively
moderate the role of flexible environmental policy in pro-
moting technological innovation in the eastern region. Un-
fortunately, the hypotheses have not been verified in the
central region.
5.2. Policy implications
The policy implications derived from the aforementioned con-
clusions include:
(1) Flexible environmental policy is important driver for sus-
tainable development of China’s industry. Consequently,
Chinese department of ecology and environment should
make efforts to establish well-designed flexible environ-
mental policy instruments including environmental taxes,
pollutant discharge fees, environmental subsidies and
emissions trading, and allow price mechanism to guide en-
ergy conservation and emission reduction of industrial en-
terprises. In the meantime, the government should maintain
the market mechanism of environmental protection, focus
on preventing information asymmetry, unclear property
rights and rent-seeking behaviors that may impede the ef-
ficacy of flexible environmental policy, and reduce or even
extirpate market failure.
(2) Sustainable development of China’s industry can also gain
momentum from technological innovation. Therefore, on the
one hand, in order to improve firm’s capability of indepen-
dent innovation, Chinese government is suggested to
encourage industrial enterprises to amplify R&D intensity,
large and medium-sized industrial enterprises to establish
R&D institutions, or enterprises to establish collaborative
innovation centers with universities and scientific research
institutions. The intensity should be strengthened of energy-
saving and environmental technology and process in-
novations so as to push industrial enterprises to shift from
high-consumption, high-pollution, low value-added devel-
opment to high-quality development with low carbon and
energy conservation. On the other hand, the government is
supposed to set up a major project pool of key and generic
technologies of the industry and continue underpinning the
fundamental research for breaking the bottleneck of key
technologies.
(3) Chinese government should accelerate the improvement of
environment regulatory enforcement mechanism and
strengthen its moderating effect on the relationship between
flexible environmental policy and technological innovation.
First, vertical management is expected to come into force
among local EPBs to reduce local government intervention in
the affairsdlike personnel and finance of EPBs. Second, the
government should endeavor to ameliorate laws and regu-
lations pertaining to environmental protection so as to
curtail the discretionary space when enforcing environ-
mental policies and wield in accordance with law regulatory
enforcement powers. Third, big data technologies should be
applied to the monitoring on pollutant discharge information
of industrial enterprises. The government is supposed to
intensify penalties for enterprises who violate environ-
mental policies, and increase investments to strengthen the
building of environment law-enforcing team and reinforce
law-enforcing strength.
(4) For the eastern and western regions, the governments can
further optimize the flexible environmental policy in order to
enhance the role of promoting technological innovation, and
 B. Yuan, Y. Zhang / Journal of Cleaner Production 243 (2020) 118543
then realize industrial sustainable development. At the same
time, the government should improve the environmental
regulatory enforcement mechanism in these two areas and
guide industrial enterprises to enhance green technological
innovation. For the central region, on the one hand, it should
pay attention to the non-environmental characteristics of
technological innovation. On the other hand, the government
should go deep into the investigation of industrial enter-
prises, and find and solve the obstacles existing in the
implementation of flexible environmental policy and envi-
ronmental regulatory enforcement.
5.3. Limitations and future research prospects
Inevitably, this paper has some limitations, hereby providing
direction for future research. First, owing to data availability,
exclusive of environmental subsidies and emissions trading, this
paper solely adopts pollutant discharge fees to measure flexible
environmental policy. Although this measure is used by a majority
of previous literature, it may give rise to measurement bias. Future
research can attempt to build a comprehensive index on flexible
environmental policy. Second, we only discuss the moderating ef-
fect of environment regulatory enforcement on the relationships
between flexible environmental policies and technological inno-
vation, technological innovation and industrial sustainable devel-
opment. The moderators such as marketization degree, factor
distortion degree and ownership type can also be examined in the
future.
Conflicts of interest
The authors declare no conflict of interest.
Acknowledgements
This research work is supported by the Social Science Founda-
tion of Hunan Province (18YBQ133), by the National Natural Science
Foundation of China (71703171), by the Natural Science Foundation
of Hunan Province (2018JJ3889; 2018JJ2683).
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