Environmental Regulations, Directed Technical Change and Vertical
Division of Value Chain
Beining Liu
School of International Trade and Economics, University of International Business and Economics, Huixin East Street,
Beijing, China
Keywords: Environmental Regulations, Technological Innovation, Vertical Division, Global Value Chain.
Abstract: This paper briefly reviews the economic literature on environmental regulation, technological innovation and
vertical division of labor of value chain in the past decade. We first use a stylized growth model to analyze
the channels and results of environmental regulations and the technological innovation they brought by. Then,
we consider the impact of technological innovation brought by two forms of environmental regulation on the
position of economic agents in the value chain. The results show that energy efficiency innovation brought
by intensive environmental regulation has a more significant impact on economic performance, while product
innovation brought by extended environmental regulation has a stronger promotion effect on the position of
economic agents in the value chain. Available empirical evidence supports our results. Finally, we conclude
with the goals that policies should nail in specific situations and the likely impact of different policies.
1 INTRODUCTION
How to deal with the increasing environmental
concentration caused by the consumption of fossil
fuels and take appropriate measures to ensure the
efficiency of economic growth is one of the most
serious challenges facing by the mankind today. And
public regulations provide the necessary action target
and organization frame to face and solve this
challenge. Although a large number of studies focus
on evaluating the implementation effect of public
regulations, exploring the feasibility of developing
alternative energy sources and the realization path of
improving economic efficiency, all of the main policy
analysis literature almost ignores the impact of
environmental policies on economic efficiency.
Existing evidence shows that strict environmental
regulations tend to produce positive externalities,
leading to higher economic efficiency, and economic
subjects tend to be in a higher vertical division of
labour in the Global Value Chain (GVC). On the
other hand, the concentration of production factors in
energy conservation and emission reduction may also
change the impact path of technological innovation
on economic performance, and form a resistance to
the climb of the value chain of economic entities.
What kind of environmental regulation can bring
efficient technological innovation to economic
subjects? Does such technological innovation have a
similar effect on the embedment position of economic
agents in the vertical division of labour in the GVC?
This paper briefly reviews the economic research on
these two topics, with a focus on the contributions of
the last decade.
2 LITERATURE REVIEW
2.1 Environmental Regulations and
Technological Innovation
Economic papers on environmental regulations and
technological innovation can be traced back to the
late 1980s and early 1990s, and the main issue is
whether the former promotes the latter. Different
schools hold different views on this. For example, the
Neoclassical School believes that environmental
regulation will increase the additional burden of
enterprises not to use for production, which will at
least lead to the regression of enterprises' production
efficiency in the short term (Barbera, et al, 1990,
Jorgenson, et al, 1990). In this regard, Poter and Van
der Linde (Poter, Van, 1995) put forward a different
point of view through case study. Appropriate
422
Liu, B.
Environmental Regulations, Directed Technical Change and Vertical Division of Value Chain.
DOI: 10.5220/0011183200003440
In Proceedings of the International Conference on Big Data Economy and Digital Management (BDEDM 2022), pages 422-431
ISBN: 978-989-758-593-7
Copyright
c
2022 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
environmental regulation can improve productivity
through efficiency improvement, redistribution and
innovation incentive, which is also known as the
"Porter Hypothesis".
The issue of environmental regulations and
technological innovation attracted wider attention for
the first time at around 2008, mainly including
environmental quality, economic models and
technological innovation in the context of climate
change (Maria et al, 2006, Bosetti, et al, 2008,
Carraro, et al, 2009). These early studies generally
argue that increased investment in technology R&D
should be advocated in the context of climate change,
and highlight the importance and feasibility of a low-
carbon economy and cleaner production. This is
because, as a result of climate policy implementation,
especially when there is a weak substitutable
relationship between energy and non-energy sectors,
technological innovation will always be oriented
towards energy knowledge, thus diluting the potential
crowding out effect between the two sectors. The
advance of this view lies in the ability to distinguish
the energy and non-energy sectors, and then
investigate the heterogeneity of the effects of
technological innovation on the energy and non-
energy sectors.
A second wave of research was revived in less
than five years. This wave involves two distinct
research paradigms. On the one hand, under the
leadership of Acemoglu, endogenous technological
changes in the growth model with environmental
constraints have been preliminally investigated
(Acemoglu, et al, 2012, Acemoglu, et al, 2014). This
is the first theoretical study to emphasize the
importance of technological change direction under
environmental regulations: the best policy direction is
to immediately transform endogenous technological
progress into cleaner production knowledge and
technology. Compared with the existing literature,
this kind of research expands the understanding of
technological innovation: for different sectors,
technological innovation should be introduced
differently to emphasize that the environmental
regulations implemented by the economy have
different policy objectives and therefore different
policy effects. On the other hand, compared with
technological innovation, a series of models
developed around 2012 paid more attention to the
impact of industrial structure on regional
environmental quality (Whitmarsh, et al, 2011,
Turnheim, et al, 2012). These studies suggest that the
industrial structure or scale of a region (such as
mainland China) will affect its total carbon emissions
or carbon emission intensity; this effect may be
achieved through indirect transmission mechanisms.
Existing evidence shows that technological progress
brought by environmental policies does not itself
improve environmental quality, but achieves energy
conservation and emission reduction through
upgrading or optimization of industrial structure.
These studies have established a goal for the
implementation of public policies, that is, policies
that focus on the regional industrial structure may
bring about higher economic performance.
At the same time, some literature focused on the
empirical evidence of the effect of environmental
regulation on promoting technological level, and the
results were often positive. Its core conclusion is that
environmental regulation may lead to an increase in
the proportion of innovation (R&D) expenditure
(Testa, et al, 2011). In general, moderate
environmental regulations can promote the progress
of production technology. As a matter of fact, earlier
studies on verification of Porter's hypothesis in China
reached a similar point of view (Li, et al, 2010), but
only reasonable environmental regulation can
promote technological innovation of enterprises, and
different environmental policies should be adopted
for heterogeneous departments or enterprises. The
contribution of this kind of research lies in affirms the
difference between environmental regulations and
emphasizes the applicability of environmental
policies to economic subjects. In addition, the input
of policies may not produce equal or higher returns,
and economic entities need to bear the risk premium
of the transformation of innovation achievements.
Finally, there has been a third wave of interest
since 2017. Based on the fact of global environmental
crisis and energy shortage, the aim is to explore the
feasibility of energy transition and the long-term
technical and economic characteristics of energy
transition (Kittner, et al, 2017, Gielen, et al, 2019); It
can be found that the research on environmental
regulations and technological innovation has been
gradually inclined to the performance evaluation in
the field of energy. Literature shows that energy
efficiency has the most obvious impact on
environmental quality. Resource innovation and
knowledge innovation are also important aspects of
environmental innovation. At the same time, as new
environmental and economic data have been
generated by natural experiments on the
implementation of environmental policies in various
countries, more and more empirical evidence has
been generated from the hypotheses and models
emphasized in the early literature, further
contributing to the emergence of more positive views
on environmental policies (Shahbaz, et al, 2018).
Environmental Regulations, Directed Technical Change and Vertical Division of Value Chain
423
Therefore, the main contribution of the recent
literature is to consider the possibility of energy
transition and energy efficiency as an approach,
based on natural experimental data in various
countries, and to demonstrate the economic and
policy feasibility of this approach.
2.2 Literature Review of Global Value
Chain
Since the study of Gereffi and Korzeniewicz (1994)
in the 1990s, Global Value Chain, as an organized
global division of labor, has attracted the attention of
a wide range of disciplines. In such a division of labor
system, developed economies, with their high
production technology and diversified products,
occupy a relatively high position in the GVC.
Developing economies participate in the division of
labor in the GVC, and attract the processing and
transfer of intermediate products from developed
economies by virtue of cheap low-skilled labor
factors and environmental capital on the premise of
relatively lack of production technology and physical
capital. The relatively low-end position in the GVC
creates opportunities for domestic economic growth.
From the perspective of resource endowment,
developed economies have innate advantages in
technological innovation. With relatively rich
resources and experience, they can form scale effect
of technological innovation and maintain their
position and benefits in the division of labor in the
global value chain (Brandt, Thun 2010). This
innovation is mainly manifested in two aspects:
Technological innovation of final products and
intermediate products (Gereffi, 2014). In particular,
emerging economic powers have huge final product
and intermediate product markets, especially the
differentiated demand of the final product market,
which provides a huge resulting demand for the
technological innovation of intermediate product
production. After the innovation is completed and
applied, it can compete in intermediate goods markets
in developed economies. One of the manifestations of
this phenomenon is that exports participating in the
GVC will use more domestic intermediate products,
which is reflected in the improvement of the
embedding position of economies in the GVC
(Zheng, Zheng 2020). Furthermore, strong
innovation capability of intermediate products may
even produce knowledge and technology spill over to
developed economies, providing a reliable path for
the climb of global value chain (Lu, Ng, 2012, Utar,
TorresRuiz, 2013).
It can be seen that technological innovation in
specific production links can change the division of
labour status of economies in the global value chain,
that is, realize the climb of the GVC. According to the
existing literature, technological innovation caused
by environmental regulation mainly involves energy
utilization and clean production, which covers all
links in the GVC from primary products, intermediate
products to final products. Then, is the technological
innovation caused by efficient environmental
regulation homogeneous with the technological
innovation that can promote the climb of value chain?
Therefore, a satisfactory framework for studying
the embedment of environmental regulation,
technological innovation and the position of the GVC
should recognize the existence of environmental
regulation with different objectives and technological
innovation with different impact paths. It also
includes the endogenous influence of technological
innovation brought by environmental regulation on
economic performance and the endogenous reaction
of the embedment position of economic subject in the
vertical division of labor of value chain on
technological innovation. Specifically, what kind of
environmental regulation can bring efficient
technological innovation to economic subjects? What
impact will such technological innovation have on the
embedment position of economic agents in the GVC?
We hope that a step can be taken towards this
framework.
The rest of this paper will be arranged in the
following patterns: in the third section, we set up an
environmental regulation, technological innovation
and economic performance benchmark
growth model,
the introduction of two dimensions of energy
efficiency innovation and product innovation, to
simulate the environmental regulation through
technology innovation to affect the path of economic
performance, and the efficient simulation results are
analysed. The fourth section introduces the influence
of two dimensions of technological innovation on the
embedment position of economic subjects in the
vertical division of GVC. The fifth section discusses
the choice and direction of policy from the
perspective of policy makers. Finally, the article will
end in section 6.
3 A BENCHMARK GROWTH
MODEL CONSIDERING
ENVIRONMENTAL FACTORS
In this part, we propose a stylized model of
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424
endogenous growth; it will be used as a benchmark in
the following analysis. On this basis, we consider the
impact of the implementation of environmental
regulations on economic performance, and the impact
of the impact of the results of the model.
Our model depicts a universally representative
economic agent whose economic performance is
driven by and only by four factors: technological
level, human capital, physical capital, and natural
capital. We first describe the characteristics of the
production sector and derive the analytic formula of
endogenous economic performance as a function of
environmental factors. Then we describe the
characteristics of environmental regulation and turn
environmental regulation into a function of economic
performance. It is advisable to keep all the given
values.
3.1 Four-factor Economic Growth
Model
According to the adjusted Cobb-Douglas function, in
each period, human capital (ℎ
), physical capital (𝑘
)
and natural capital (𝑒
) are combined to produce
economic performance ( 𝑦
) at a specific
technological level (𝐴
). Among them, we define
natural capital as the synthesis of net environmental
factors that can be used by economic entities and
affect economic performance, including
environmental quality and natural resources, without
considering the heterogeneity between the two.
Therefore, the performance of the economic agent
(𝑦
) is a function of the human capital (ℎ
), physical
capital (𝑘
) and natural capital (𝑒
) it can obtain:
𝑦
=
𝐴
𝑘
ℎ
𝑒
(1)
Further, each element can be combined with
different technical conditions, that is, the knowledge
required to transform production technology into
different elements, then economic performance can
be expressed as a function of the product of each
element and its knowledge:
𝑦
=
𝐴
𝑘
·
𝐴
ℎ
·
𝐴
𝑒
(2)
In the above formula, A
t
is a scale parameter that
changes with time and depends on the product of
productivity of each single factor. It is assumed that
the individual factors and their productivity are
heterogeneous and completely irreplaceable to each
other. 𝛼, 𝛽 ∈ [0,1] represents the share of physical
and human capital in the income of economic entities
respectively and satisfy 𝛼+𝛽∈[0,1].
We assume that physical capital is completely
depreciated in a certain period, and human capital
will lose its ability to contribute to economic
performance in a certain period. From the perspective
of potential investors, each economic entity has the
risk premium of physical and human capital
respectively, so the ratio of marginal return to risk
premium constitutes the risk-free interest rate. The
risk-free rate of physical capital follows the following
formula:
R
·Φ
=αA
k
-
h
e
--
(3)
Here 𝑅
is the risk-free interest rate of physical
capital at time 𝑡, and 𝛷
is equal to the risk premium
of physical capital depreciation.
The utilization cost rate of natural capital per unit
is given by the following formula:
𝑐
=
𝐴
𝑘
ℎ
𝑒
(4)
Rearrange equation (3) and substitute it into
equation (1), so that economic performance can be
expressed as a function of natural capital and human
capital:
𝑦
=𝛼
𝐴
𝑅
𝛷
ℎ
𝑒
(5)
Similar to equation (3), considering the risk
premium caused by the elimination of human capital,
take R
as the risk-free interest rate of human
capital at time t and φ
the risk premium of human
capital depreciation, the following formula is given:
R
·φ
=
-
α
-
A
-
R
-
Φ
-
e
--
-
h
-
-
(6)
Rearrange equation (6) and substitute it into
equation (5) so that economic performance can be
expressed as a function of natural capital:
y
=(α
A
)
--
·
(
-
)
-
·
·
e
(7)
Clearly, economic performance depends linearly
on the amount of natural capital per unit, increasing
as production technology improves and decreasing as
the risk premium increases.
Through equations (4) and (7), the utilization cost
rate per unit of natural capital can also be expressed
as an equation determined only by production
technology and risk premium:
𝑐
=(𝛼
𝐴
)
·
𝜑
𝛽
(
1−𝛼
)
𝑅
𝑅
·𝛷
(8)
The utilization cost rate of natural capital does not
directly depend on the factor endowment of economic
subjects. However, technological level can be
regarded as positively correlated with natural capital.
This is not inconsistent with the resource curse
theory, because as explained above, the natural
Environmental Regulations, Directed Technical Change and Vertical Division of Value Chain
425
capital we consider is not exactly equivalent to the
stock of natural resources, but the sum of
environmental quality and natural resources that can
be used by economic agents. This equation
emphasizes the role of technological level on
economic performance, which is consistent with
Schumpeter's growth theory. Among them, the
technological level is equal to the product of
productivity of each single factor, which depends on
the technological innovation ability of each factor. It
should be noted that technological development may
accelerate the depreciation of physical capital, but its
impact on the renewal cycle of human capital is not
directed which specifically depends on the culture
and strategy of economic entities, will affect the risk
premium and lead to changes in the use cost. This
gives a cost-setting equation for natural capital:
𝑦
=𝐶
(
𝑒
,𝑋
)
(9)
Here 𝑋
is a set of characteristics that affect the
production techniques and risks of economic agents.
Based on the above analysis, we assume that there is
𝐶
(
0, 𝑋
)
≥0,𝐶
>0 ; with the second order
condition 𝐶
<0; This means that our model is
compatible with yield effects trait.
3.2 Internalization of Environmental
Regulation: Product Innovation
and Energy Efficiency Innovation
We now internalize the impact of environmental
regulation. In our growth model, total factor
productivity 𝐴
is determined by the product of
individual factor productivity. The implementation of
environmental regulation shows that limited capital is
invested into natural capital and inevitably brings
technological innovation. The spillover effect of
technological innovation is reflected in its impact on
natural capital stock and factor productivity, without
changing the stock of physical or human capital and
factor productivity. Policy makers aim at maximizing
economic utility and have no preference for any kind
of capital.
There is a positive correlation between production
technology and natural capital stock. Therefore, we
assume that the single factor productivity 𝐴
of
natural capital is an increasing function of capital
stock 𝑒
, and the relationship between them is in
accordance with the following equation:
𝐴
=𝜆
𝐴
(𝑒
)
(10)
λ>1 is a parameter that can capture the progress
trend of economic subjects' r&d ability for new
products, and A(e
) represents the arrangement
and utilization efficiency of economic subjects'
natural capital. Together they constitute natural capital
single factor production technology. Thus, equation
(7) can be rearranged as:
y
=α
--
(A
·A
)
--
·
(
-
)
-
·
·[
λ
·A
(
e
)
]
--
·e
(11)
In this case, 𝜆
·𝐴
(
𝑒
)
as a single factor
productivity, combined with natural capital 𝑒
, has a
nonlinear function relation with economic
performance 𝑦
.
We mentioned in this paper, on the corresponding
natural capital factor productivity function, the
environmental regulations, on the basis of the
direction it brings, are divided into only two types: (i)
extensive model of environmental regulation, can
bring about product innovation, namely the economic
entities can develop a product never produced before
(increasing the value of λ); and (ii) intensive model of
environmental regulation can bring energy efficiency
innovation, that is, economic entities still continue to
produce existing products, but can improve the
arrangement and utilization efficiency of resources
including energy, so that 𝐴(𝑒
) can be improved.
It should be noted that energy efficiency
innovation can improve the utilization efficiency of
resources, which means that pollutant emissions will
be correspondingly reduced and the relative stock of
natural capital will be improved. It is reasonably
assumed that the marginal improvement effect of
energy efficiency innovation on natural capital stock
conforms to the following formula:
𝑒
=𝐸
[
𝑒
,
𝐴
(
𝑒
)
]
(12)
Where, 𝑒
represents the increment of natural
capital brought by energy efficiency innovation; 𝑒
and 𝐴(𝑒
) represent the original capital stock and
technology level respectively, and the first-order
conditions 𝐸
(
𝑒
,0
)
>0,𝐸
(
)
>0 are satisfied.
This suggests that the increase of natural capital
brought by energy efficiency innovation mainly
depends on the original natural capital stock, and the
original technology level also has a positive effect on
the increase.
In the implementation of policies, limited policy
funds will be directed to implement intensive or
extensive environmental regulations. We assume that
the same amount of funds can bring the same amount
of policy effect, and then a certain amount of capital
input will bring an increase of magnitude δ to the
binary margin of technological innovation
respectively. We consider the changes in economic
performance brought by technological innovation: for
product innovation, the following equation can be
obtained:
BDEDM 2022 - The International Conference on Big Data Economy and Digital Management
426
𝑦
_
=
[
𝛼
𝐴
𝐴
𝐴
(
𝑒
)
]
·
𝜑
𝛽
(
1−𝛼
)
𝑅
𝑅
·𝛷
𝑒
(𝛿 + 𝜆
)
(13)
For energy efficiency innovation, the following
equation exists:
y
_
=(α
A
A
λ
)
--
·
(
-
)
-
·
[δ + A
(
e
+e
)
]
--
(
e
+
e
)
(14)
Compare the impact of the binary margin of
technological innovation on economic performance
under the same investment scale, and rearrange the
equation (11) and (12) to obtain the ratio of energy
efficiency innovation to product innovation:
𝑦
_
𝑦
_
=
[𝐴
(
𝑒
+𝑒
)
+𝛿]
(
𝑒
+𝑒
)
𝜆
[𝐴
(
𝑒
)
]
𝑒
(𝛿 + 𝜆
)
>1
(15)
This conclusion suggests that when policymakers
plan to spend the same amount of capital, energy
efficiency innovation brought about by intensive
environmental regulations can have a stronger
positive stimulus effect on the performance of
economic agents. Therefore, the policy orientation we
advocate is to transform endogenous technological
progress into knowledge that can improve resource
utilization efficiency. This policy conclusion is
compatible with the results of Acemoglu et al.
(Acemoglu, et al, 2012).
In our model, the creation of economic benefits
does not depend on the stock of physical and human
capital, but the stock of natural capital and the
technical level of economic subjects can determine the
impact scale of environmental policies on economic
performance. At the same time, the implementation of
policies can improve the utilization efficiency of
natural capital by economic subjects, which
constitutes the benefit equation of natural capital
under the condition of whether to implement
environmental policies or not. In the absence of
environmental regulations, there are:
𝑦
=𝑅
(𝑒
,𝑈
)
(16)
In the implementation of environmental
regulations, the revenue equation is:
𝑦
=𝑅
(𝑒
,𝑈
)
(17)
In this occasion, 𝑈
is a set of characteristics that
affect resource utilization and R&D innovation
efficiency of economic subjects. According to our
model and inference, when natural capital is zero,
there is no economic output. After the implementation
of environmental policies, natural capital can produce
economic performance with higher efficiency. As a
result, we get 𝑅
(
0, 𝑈
)
=𝑅
(
0, 𝑈
)
=0,𝑅
>
𝑅
>0. At the same time, based on the natural
capital stock of energy efficiency innovation spillover
effects, assuming that the second order condition
𝑅
>0,𝑅
>0, which suggests that the stock
of natural capital has a scale effect on the economy.
3.3 The Cost-revenue Analysis of
Natural Capital
We now focus on the cost-revenue threshold in the use
of natural capital. As the stock of natural capital in a
region increases, the cost necessary to use natural
capital changes monotonously with the benefits it
brings, and the two can reach parity at some point
(denoted by subscript 𝑞). Combining formula (7) and
formula (14), it can be considered that the model has
a unique non-zero critical value, under which 𝑦
=
𝑅𝑒
=𝐶𝑒
. Figure 1 provides a reasonable
scenario that constitutes a unique threshold, in which
we assume that natural capital always has an
increasing unit return and a decreasing unit cost for
economic performance. The relationship between
natural capital and cost is identified by the cost setting
equation, and the relationship between natural capital
and income is expressed by the income setting
equation.
Figure 1: Cost-benefit Analysis of Natural Capital.
In the example in Fig. 1, there is a unique non-zero
threshold for the costs and benefits of natural capital
use, regardless of whether environmental regulations
are enforced or not. Assuming that both A and B are
dynamically stable, the equilibrium point A is the
critical point at which economic subjects have
incentive to use environmental capital to create output
before implementing environmental regulation.
Equilibrium point B is the critical point after the
implementation of environmental regulations.
y
t
e
t
A
B
O
e
q_A
e
q_B
y
q_A
y
q_B
C(e
t
)
R
i
(e
t
)
R
n
(e
t
)
Environmental Regulations, Directed Technical Change and Vertical Division of Value Chain
427
When 𝑒
∈ [0, 𝑒
), the economic subject will not
engage in production because the cost of using natural
capital is higher than the income it brings; when 𝑒
∈
[𝑒
,𝑒
), the economic subject will use natural
capital to produce and obtain benefits. Intensive,
therefore, the implementation of the environmental
regulation reduces the economic subject the threshold
of the natural capital needed for production, can make
more economic main body involved in the social
production; for enterprises to participate in
international trade, this change will affect them in the
international division of labor in the product structure,
cause they are vertical division of labor status changes
in the global value chain.
4 GLOBAL VALUE CHAIN:
DIRECTED TECHNICAL
CHANGE AND CLIMBING
CHANNEL
4.1 The Potential Result of Directed
Technical Change
As explained in our empirical analysis, the influence
path of the embedment of vertical division of labor
position in response to technological progress needs
to be distinguished. This is mainly based on the
nature of energy efficiency innovation, product
innovation and value chain respectively: product
innovation brought by extensive environmental
regulations is essentially the research and
development of new products, which can create more
possibilities for economic entities to embed in global
value chain. Product R&D is a knowledge-intensive
process. On the one hand, it may require the
participation of industries at the high end of the value
chain. On the other hand, there is a demand for its
achievements to serve the high-end industries of the
value chain by producing products with higher
technology content to replace the original and low-
technology products. The result of this process is that
the status of economic subjects in GVC has been
improved, that is, the value chain has climbed.
Consider the innovation in energy efficiency
brought about by environmental regulation. On the
one hand, the innovation process also needs the
participation of high-end industries in the value
chain; On the other hand, the reduction of energy
consumption per unit caused by intensive
environmental regulations indirectly brings higher
natural capital stock to economic subjects, which
means that the impact of innovation depends on the
degree of dependence of GVC on natural capital.
Under such an influence mechanism, the impact of
technological innovation brought by two
environmental regulations on the position of
economic subjects in the global value chain is
influenced by multiple factors. We wish to clarify this
influence mechanism through theoretical analysis.
4.2 Influence Path
We construct a production model of economic agents
in the global value chain division. Assume that the
economic agent co-produces product y with other
countries and the economic agent is not at the top end
of the GVC. For any production link 𝑖 ∈ [0, 1], the
closer 𝑖 is to 1, the closer the production link is to the
top of the global value chain. The economic subject
undertakes the production process of
[
𝑚,𝑘
]
; 𝑚,𝑘∈
[0, 1) in the global value chain.
According to the conclusion drawn in the fourth
part of the paper, it is reasonable to assume that all
economies and production links need only natural
capital (𝐸
) and technological level (𝐴
); 𝑝 and 𝑞
represent the unit use price of natural capital and
technology level respectively. Producing one unit of y
requires 𝑒𝑖
⁄
units of natural capital and ai units of
technology. When energy efficiency innovation
occurs, the stock of natural capital increases and the
amount of natural capital required to produce a unit of
product decreases. The unit price of natural capital is
usually determined by its mining rate and social
discount rate, which will not change in the short term.
Therefore, the result of energy efficiency innovation
will be shown as the reduction of parameter 𝑒. At the
same time, when product innovation occurs, the unit
use price of technology level will decrease in the short
term, which is manifested as the decrease of 𝑞 value.
In a perfectly competitive market, economic
performance is approximately equal to its production
cost. Therefore, when economic entities produce 1
unit of performance 𝑦, it can be expressed in the
following formula:
y
=
(
+aqi
)di
(18)
Where, monomial 𝑒𝑝 𝑖
⁄
constitutes the total cost
of using natural capital 𝐸
, and aqi constitutes the
total cost of using technical level 𝐴
. We respectively
pay attention to the impact of economic performance,
natural capital and production technology on the
position of economic subjects in the value chain, and
obtain:
𝜕𝑘
𝜕
𝐴
>
𝜕𝑘
𝜕𝐸
(19)
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428
This conclusion indicates that product innovation
plays a higher role than energy efficiency innovation
in promoting economic entities' position in the vertical
division of value chain. In other words, product
innovation will be more efficient for the promotion of
economic subject's position in the value chain.
The influence path of product innovation can also
be explained by additional influence mechanisms. The
connotation of product innovation as defined by us is
that economic subjects produce new products that
have never been involved before under the stimulus of
environmental policies. After the research and
development results are applied, the original products
will be completely eliminated, and eventually most of
them will even be completely withdrawn from the
market. In addition to our suggestion that innovation
requires the participation of the higher end of the value
chain, the results of innovation, namely the new
products developed, also tend to have higher
technological added value. The implementation of
environmental policies is usually inclusive, which
means that the technological innovation proposed by
the policies is the choice of the vast majority of
subjects. We assume that economic subjects do not
need to bear the risk premium caused by innovation
failure, and then the effect of policy implementation
will be reflected in the improvement of the division of
labor status of broad economic subjects or regions in
the value chain.
According to our conclusion, if we simply
consider from the perspective of efficiency, there is no
environmental policy that can make economic
subjects maximize their economic performance and
maximize their position in the value chain. The
maximization of one side's efficiency inevitably
means the loss of the other side's efficiency. This
means that policy makers need to make trade-offs
between the two policies according to the reality of
policy recipients.
4.3 Evidence
In terms of the research on product innovation and
energy efficiency innovation, there are two papers
that provided some of the more influential research
(Pye, McKane, 2000, Gerstlberger, Knudsen,
Stampe, 2013). Both papers limited the economic
agent to the dimension of the firm, and examine the
relationship between product innovation and energy
efficiency, or synergies. Pye and McKane (2000)
pointed out that energy efficiency may be a by-
product of product innovation, and the product
innovation can also arise as a by-product of energy
efficiency improvement, and concluded that
management must understand the costs and benefits
associated with energy efficiency investments,
regardless of the direction of this influence
mechanism. Different from Pye and McKane,
Gerstlberger et al. (Gerstlberger, et al, 2013) drew
different conclusions after using data from a larger
sample: Product innovation and energy efficiency in
business operations are often separated, so business
managers also need to make trade-offs in business
strategies, depending on whether the performance of
the business is more urgently needed, or whether it is
to meet the needs of environmental friendliness.
These analyses tell us that policy and strategy makers
are often faced with the contradiction of promoting
product innovation or energy efficiency innovation,
and it is still worth exploring whether there are
spillover effects between the two. However,
in reality,
there may exist public environmental policies that
promote both product innovation and energy
efficiency innovation. The implication for us is that a
combination of environmental policies is
recommended when policy funding constraints are
not tight.
5 POLICY IMPLICATIONS
In our analysis, policy makers often face the dilemma
of promoting product innovation or energy efficiency
innovation, that is, whether to implement intensive or
expansive environmental regulations. So, in the face
of this dilemma, how should policymakers consider
the direction of policy? Should their policy objectives
be adjusted or maintained?
First, we need to consider why environmental
policy needs to be anchored to targets for economic
performance or product structure. According to
environmental economics, the primary goal of
environmental policy is not to achieve environmental
friendliness, but to integrate the limited
environmental resources, produce economic
performance, and realize the maximization and
sustainability of output efficiency. This means that
the environmental policies implemented will rarely
maintain the stock of natural capital at the expense of
long-term economic growth. Therefore, both of the
economic performance and product structure are
factors that must be considered in the implementation
of environmental policies.
Another reason for this dilemma is why an
economic entity should care about its position in the
vertical division of labour in the value chain. Higher
vertical division of labour status usually means that
the products produced by economic subjects contain
Environmental Regulations, Directed Technical Change and Vertical Division of Value Chain
429
higher added value; In international trade, each unit
of product sold, high value-added products can bring
higher profits than low value-added products, in other
words, will affect the efficiency of economic subjects
in international trade profit. If foreign trade is an
important source for economic entities to obtain
economic performance, it is necessary to pay
attention to product structure and its position in
vertical division of labour in the implementation of
policies.
As we conclude in Section 5, when policy funds
are abundant, the policy mix is usually the
recommended course of action. However, if there are
relatively strict capital constraints, such as in less
developed economies or regions with high
implementation costs, there is usually a choice of
policy implementation. In this case, we suggest that
the policy orientation of prioritizing economic
performance should be considered. Economic
subjects choose to improve the status of international
division of labour in the hope of obtaining more
efficient economic output. Strictly speaking, it still
belongs to the path of pinning economic
performance. If the policy has a high implementation
cost, it is more efficient to implement intensive
environmental regulations to drive energy efficiency
innovation, thus obtaining a higher relative stock of
natural capital and directly contributing to economic
output.
In addition, both product innovation and energy
efficiency innovation have positive effects on the
performance of economic entities and their position
in the vertical division of labour. This can also be
proved by the theoretical model we have constructed.
As for the promoting effect of product innovation on
economic performance, formula (11)-(9) is
considered to obtain:
y
_
-y
=
·
(
-
)
-
[
(
)]
-
·[(δ+
λ
)
--
-λ
--
]>0
(20)
The role of energy efficiency innovation on the
position of economic subjects in the vertical division
of labor in the value chain is as follows:
y
=
(
+aqi
)di ,
<0
(21)
What we mainly evaluate in this paper is the
effectiveness of the two innovation paths in
promoting economic performance or division of labor
status respectively. Product innovation can also
improve the output performance of economic entities,
and energy efficiency innovation can also have a
positive impact on the position of economic entities
in the vertical division of labor in the value chain. In
this dimension, similar experience in policy practice
can also be reasonably explained.
6 CONCLUSIONS
This paper briefly reviews the economic literature on
environmental regulation, technological innovation
and vertical division of labor of value chain in the past
decade, with a focus on the role of technological
innovation and directional technological change
brought by environmental regulations on vertical
division of value chain. Developing countries and
development economists pay close attention to the
transition from a single product exporter, a low value-
added product exporter to a high value-added product
producer. Through technological innovation, we can
see that countries at the lower end of the value chain
are able to transform their product mix, thus reducing
economic inequality among the international
community.
According to Porter's Hypothesis, environmental
regulation can improve economic performance by
promoting technological innovation, but the path
behind this influence mode and the effect of the same
influence path on the position of economic subjects
in the value chain need to be further investigated. To
test these two questions, we design two stylized
growth models that are flexible enough to include the
effects of environmental policies in different
directions on economic performance and the location
of vertical division of labor. We define intensive and
extensive environmental regulations, which can bring
energy efficiency innovation and product innovation
to economic entities respectively. Our results show
that intensive environmental regulations can bring
more incremental performance to economic actors
through energy efficiency innovation, while
extensive environmental regulations can promote
economic actors to climb up the value chain through
product innovation. The existing literature provides
empirical evidence for our conclusions, which
indicates that our conclusions are basically
compatible with the practical environmental policies.
What are we going next? As we suggest in this
article, the policy mix is usually the recommended
approach. However, when the implementation cost of
combination policies is too high, we still suggest that
intensive environmental regulations should be
implemented to drive energy efficiency innovation,
and the direct spillover effects of environmental
regulations on economic performance should be
prioritized to meet the needs of regional economic
development in the short term.
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430
Finally, it is worth noting that although we
demonstrate the effects of product innovation and
energy efficiency innovation on economic
performance and vertical division of labor
respectively, the fit between model and reality still
needs further research. In particular, more empirical
evidence is needed to verify our conclusion in the
study of economic performance based on the
differentiation of technological innovation, which
may constitute the further improvement of the
analytical framework of the new Schumpeter growth
theory.
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