There are two completely different viewpoints on the research into the connection between ER and regional economic growth in academic circles: the “following cost theory” and “innovation compensation theory”. It will be an important supplement to the current literature to explore the nonlinear relationship between the inhibition of the cost effect and the promotion of the innovation compensation effect. The positive impact of KS on economic growth has been widely confirmed, while the empirical evidence of the impact of KS on the economic growth generated by environmental innovation still needs to be strengthened.
2.1. Environmental Regulation and Regional Economic Growth
From a static perspective, the carrying out of ERs objectively mandates that enterprises pay for pollution management; increase the environmental expenses and “compliance costs” of businesses; reduce the competitiveness, production effectiveness, and profit margins of enterprises; and expand to a macro level, which may hinder the expansion of the economy and represents the “following cost theory” [16
]. From this view, increasing the intensity of the ER does not increase the profit of the enterprises [17
]. Enterprises may face cost pressure from two aspects: one is the direct cost consumption brought about by reducing pollution discharge, and the other is the increasing cost of some production factors due to ER [18
]. On this basis, to achieve short-term benefits, enterprises may reduce the development of innovative projects, reduce their investment in pollution projects, or even transfer to areas with less stringent environmental regulations, resulting in environmental deterioration in another area [19
]. Based on data from five U.S. polluting industries, Barbera and McConnel proposed that ER has led to a 30% decrease in productivity in these industries, which has had a negative impact on industry development [21
]. Chintrakarn’s conclusion also indicates that the tightening of ERs has significantly reduced the technological efficiency of the manufacturing industry in 48 U.S. states [22
]. In most cases, the purpose of ERs is to limit outcomes rather than production. The data from the carbon emissions trading pilot in China project confirmed that ERs can inhibit innovation in both regulated and unregulated businesses, thereby reducing the efficiency in production [23
]. Pollution problems also exist in underdeveloped countries or regions. Aryal et al. evaluated Nepal’s environmental policy, but the lack of coordination between the government and nongovernmental organizations has hindered the achievement of the expected policy results, which has eventually led to the failure of their environmental policies [24
From a dynamic perspective, reasonable ERs not only increase the production costs to enterprises, but also force enterprises to carry out environmental innovation. When the production efficiency improvement brought about by innovation offsets or exceeds the loss of cost effect, it also results in knowledge spillovers and structural upgrading to reach a win–win scenario where both environment and economic benefit, which is the “Porter hypothesis” or “innovation compensation theory” of environmental regulation [25
]. Porter believes that ER should not be restricted to the best performance under static limits. Instead, ER is regarded as an incentive source for enterprises to innovate, enhance their competitive advantage via technological innovation, and promote their economic growth [27
]. Later, scholars tested the “Porter hypothesis”. Lanjouw and Mody used data of the United States, Japan, and Germany in the 1970s and 1980s to prove that the degrees of ER and environmental technology innovation are strongly correlated, and the purpose of developing countries importing environmental patents is mostly to adapt to local technology innovation [28
]. Telle and Larsson used Norwegian industrial data and found that the impact of ERs on the growth of the industrial total factor productivity is significant and brings an active influence on the economy [29
]. Scholars have also carried out research on “innovation compensation theory” in recent years. Using China’s urban data, Gu et al. discovered that the implementation of ER policies promotes energy conservation and emission reductions and shows a good trend on sustainable development [30
]. Starting from the theory of institutional regulation, Cai et al. discovered that direct ER owns a large and considerable incentive impact on the development of green technology innovation in developing countries [31
]. Based on the push–pull–mooring (PPM) theory, Dou et al. examined the motivating elements of the advanced manufacturing industry in the Guangdong–Hong Kong–Macao Greater Bay Area and believed that the environment was the driving factor, the economy was the pulling factor, and technology was the core factor. Technology is also the manufacturing sector’s internal development environment, which may support the sector’s intelligent development [32
]. It is well-known that corrupt regulations will bring bad influence or harm the economy [33
]. Zhou and Li considered the government’s anti-corruption work in the green economy, and the research found that when the anti-corruption intensity exceeded a certain threshold, the implementation effect of the ER increased significantly [34
]. Bayramoglu discussed the environmental policies of three developing countries (Argentina, Tunisia, and India) and found that ERs do not necessarily hinder national development and can provide incentives to modernize production [35
]. Murshed et al.’s research on four South Asian countries (Bangladesh, India, Pakistan, and Sri Lanka) concluded that ERs will reduce the negative influence of economic expansion on the environment [36
Based on the above positive and negative impacts of ERs on economic growth, there is not necessarily a simple causal or linear relationship between ERs and economic growth [37
]. Therefore, some scholars have proposed that the “U”-shaped relationship can offer a better logical justification for the two theories of ER and economic development—the “following cost theory” and “innovation compensation theory” [38
]. When the ER is at a low level, there is a growth inhibition effect. When the growth inhibition effect exceeds the threshold of the ER, the innovation compensation effect begins to appear [40
]. Liu et al. concluded that the investment-based ER effect displays a “U”-shaped curve, while the impact of fee-based ER is an inverted “U”-shaped curve, and controlling the proportions of the secondary industry, foreign direct investment, and fiscal decentralization can directly promote an improvement of the environmental quality [41
]. To sum up, this essay contends that there are two aspects in which ERs affect economic growth at the same time: one is the inhibition of cost effect, the other is the promotion of innovation compensation effect. Therefore, this paper puts forward the following assumptions:
Hypothesis 1a (H1a).
The effect of ER on regional economic growth is nonlinear.
Hypothesis 1b (H1b).
Short-term ER has a negative impact on regional economic growth.
Hypothesis 1c (H1c).
Long-term ER has a positive impact on regional economic growth.
2.2. Knowledge Spillover and Regional Economic Growth
Classical economics generally regards knowledge as an exogenous variable of economic development. During the period of new economic growth theory, scholars began to focus on the influence of KS on economic growth, but it fails to examine KS from a spatial perspective and ignores the role of spatial factors in KS and economic growth. After the rise of the new economic geography, scholars began to incorporate KS into the spatial framework. In the research on the spatial proximity of KS, Anselin et al. found that the source of KS is the absorption and reference of patent achievements [42
]. The scarcity of knowledge determines that it has the characteristics of diffusion and flow, resulting in the phenomenon of knowledge overflow [43
]. Knowledge is also condensed into technology and experience through the production process, thereby resulting in spillover effects [44
]. Economists such as Almeida and Kogut have put forward the idea that the regional flow of patent holders among enterprises affects the spatial diffusion of knowledge, and when individuals or organizations move under their social networks, such knowledge shows externalities [46
The mobilization of talent brings regional KS and spatial agglomeration [47
] and reduces production costs, while KS promotes further regional innovation, improves enterprise production efficiency, and promotes industrial transformation and upgrading and real economic growth [15
]. Many scholars have come to the conclusion that KS plays a positive role in promoting economic growth [49
]. For example, the research results based on Italian samples showed that KS has a good driving force for economic activities [50
]. Mukhamediyev et al. used Kazakhstan’s data and endogenous growth model and found out KS shows a good significance for regional economic growth [51
]. Aldieri et al., based on data from Russia, proved the important role of KS in productivity through spatial econometrics [52
]. Indonesia’s evidence also shows that the spillover effects of government spending and education are significant for regional economic growth [53
]. Some scholars have come to the conclusion—contrary to the mainstream view—that KS may lead to widening of the economic gap between the two regions [54
]. Based on the enterprise data from Zambia, an African country, Bwalya estimated via GMM that there is little evidence to support the spillover effect of horizontal channels, i.e., there is a lack of intra-industry spillover [55
]. The studies into KS mostly concentrate on the number of traditional patents or the degree of R&D, and there is a lack of in-depth research on the types of KS, especially the environmental innovation knowledge spillover seen in developing countries [56
There is little research literature about the association of EKS and economic growth, however, there have been some noteworthy research conclusions. Aldieri et al. emphasized the important role of KS in environmental innovation based on patent data from 240 European companies [57
]. Long et al. assessed the impact of environmental innovation in achieving sustainable economy in G7 economies from 1980 to 2020, and a positive facilitation was detected between economic sustainability and environmental innovation [58
]. KS from environmental innovation is beneficial to the introduction of environmental innovation [59
]. On the whole, it has a positive impact on corporate productivity and environmental sustainability, forming an environmentally friendly economy [14
]. Anser et al. aggregated global data to assess global economic growth, which also proved that KS significantly reduced carbon emissions and had a positive impact on improving corporate productivity [62
]. However, Aldieri and Vinci, based on the three regions of the United States, Japan, and Europe, reached opposite conclusions when examining the impacts of environmental spillover effects on corporate productivity from the spatial perspective [63
On the whole, there is lots of research on the positive promotion of KS and economic growth and parts of the literature also introduce spatial factors to consider the spatial effect of KS on economic growth. However, the spatial impact of EKS on economic growth is less involved. Similarly, this paper holds that EKS and general KS have similar positive promotion effects. Combining spatial factors, this paper holds that EKS has similar effects to general KS on economic growth in terms of the spatial direct effects and spatial indirect effects. Therefore, the following assumptions are made:
Hypothesis 2a (H2a).
EKS has a positive effect on regional economic growth.
Hypothesis 2b (H2b).
The direct effect of EKS can directly promote local economic growth.
Hypothesis 2c (H2c).
The indirect effects of EKS can positively promote economic growth in the neighboring areas.
To sum up, the theoretical framework of the impacts of ER and EKS on regional economic growth is shown in Figure 1