Towards a win‐win situation for innovation and sustainable development: The role of environmental regulation

Innovation and sustainable development are important concerns for countries around the world, and strengthening environmental regulation (ER) may have a critical implication for the promotion of green technology innovation. On the basis of elaborating the mechanism of ER on technological innovation, the Super-SBM-Windows-DEA model is employed to measure the green innovation efficiency (GIE) using provincial-level panel data from 2004-2017 in China. The system generalised method of moments is used to estimate the direct effects of ER on GIE, an innovative mediating effect model that based on structural equation model is utilised to explore their indirect effects. Further, a spatial econometric model is developed to examine the possible spatial effects between ER and GIE. The 'U' shaped relationship between ER and GIE is verified in the direct effect test. The results of the indirect effects indicate that ER is not conducive to GIE by discouraging the inflows and outflows of FDI, while it contributes to GIE by promoting the structural upgrading of industry. The spatial effect results show that the impact of ER on GIE in neighbouring areas has an obvious spatial spillover characteristic, which is manifested as an inverted 'U'-shaped relationship of promotion followed by inhibition. The paper further proposes policy implications including strengthening cross-regional joint prevention and control, integrating ER strategies, and rational application of ER tools, so as to promote a win-win development of innovation and sustainability, and the positive effects of ER are better developed.