Environmental Logic of Firm Location Decisions: Vertical Management Reform and Low-Carbon Firm Entry

Abstract

Against the backdrop of the ongoing global green transition, how environmental governance reforms can steer newly created productive capacity toward low-carbon development has become a critical issue for achieving deep industrial decarbonization. This study exploits China’s reform of the vertical management system for environmental monitoring, supervision, and law enforcement below the provincial level as a quasi-natural experiment. Using prefecture-level firm registration data from 2012 to 2023 and the staggered rollout of the reform across provinces, we employ a staggered difference-in-differences model to examine its effects on low-carbon firm entry and the underlying mechanisms. The results show that the environmental vertical management reform significantly promotes the entry of low-carbon firms, and this finding remains robust across a series of robustness checks. Mechanism analysis indicates that the reform facilitates low-carbon firm entry by reducing institutional barriers to entry and improving the efficiency of capital allocation. Heterogeneity analysis reveals that the effect is concentrated in knowledge-intensive industries, including scientific research and technical services, leasing and business services, and culture, sports, and entertainment. The effect is also more pronounced in regions with greater dependence on tax revenues and in cities located away from provincial borders. Further analysis shows that the reform promotes industrial low-carbon transformation through multiple margins. At the aggregate margin, it facilitates the entry of firms in low-carbon industries and the exit of firms in high-carbon industries. Within high-carbon industries, it induces a green structural reallocation from more carbon-intensive firms toward less carbon-intensive firms. It also encourages surviving high-carbon firms to upgrade their production by increasing environmental investment and pursuing green technological innovation. By examining both firm entry and exit, this study uncovers the micro-level mechanisms through which environmental governance reform shapes industrial low-carbon transformation and provides empirical evidence and policy implications for improving vertical environmental governance and advancing coordinated industrial decarbonization.