Environmental regulation and development of the tertiary industry

Environmental regulation has become an important policy practice in many countries, and it has an effect on economic development. Previous literature has focused on the effect of environmental regulation on the development of the aggregate economy or the secondary industry while ignoring its effect on the development of the tertiary industry. Accordingly, we systemically identify for the first time the causal effect of environmental regulation on the development of the tertiary industry. Exploiting the great exogenous variation in regulatory intensity generated by China’s 2013 Air Pollution Prevention and Control Action Plan, we apply the difference-in-difference method to China’s province-sector panel data from 2009 to 2017. The results suggest that environmental regulation reduces the fixed asset investment and value-added of tertiary sectors but increases the establishment of legal entities in tertiary sectors. Thus, environmental regulation does lead some production resources flowing to local tertiary sectors. However, this flow fails to reverse the decline in the investment and production of local tertiary sectors. Environmental regulation affects the development of the tertiary industry through industrial linkages between the secondary and tertiary industries, the flow of production resources from the secondary to the local tertiary industry, and the local governments’ taxation and spending behaviour.