The Agglomeration of Manufacturing Industry, Innovation and Haze Pollution in China: Theory and Evidence

Haze pollution in China is a serious environmental issue, which does harm both to people’s health and to economic development. Simultaneously, as an important industrial development law, agglomeration may result in the increased concentration of manufacturing firms and, consequently, an increase in haze pollution. However, the positive externalities of agglomeration can also improve the efficiency of regional innovation, which curbs haze pollution. In this paper, we construct both theoretical and empirical models to investigate the effects of industrial manufacturing agglomeration on haze pollution. The results reveal the following: (1) By incorporating the effect of agglomeration and haze pollution into a general endogenous growth model, we show an inverted-U relationship between agglomeration and haze pollution on the balance growth path. (2) Based on data concerning haze pollution (PM(2.5)) and data from 285 Chinese cities, the empirical results verify the findings of the theoretical model. Further, we calculated the values of agglomeration variables, with respect to the inflection points of the inverted-U, which the cities need to reach in order to gain the specific agglomeration values required to enjoy the inhibition effect of agglomeration on haze pollution. (3) A heterogeneity analysis shows that the inverted-U relationship is more obvious among the cities in the middle and northeastern areas of China, as well as medium-size cities. (4) Cities’ environmental regulation policies and high-quality institutional environments can restrain the positive effect of agglomeration on haze pollution. (5) Using three measures of innovation, it is also empirically found that innovation is the mechanism (mediator) between agglomeration and haze pollution.