Abstract: In the context of the special institution of China's transition economy, the local governments' intervention in the factor market may result in the distortion of the factor market and further impact the effect of environmental regulations on the green competitiveness. Based on China's 2004-2018 urban panel data, this paper employs the dynamic spatial Dubin model and the spatial simultaneous equation model to conduct a test. The results show that strengthening the local environmental regulations will improve the green competitiveness through improving resource allocation efficiency, forcing the upgrading of industrial structure, driving green technology innovation and other channels. However, due to the lack of coordinated governance among local governments on environmental issues, environmental regulations in neighboring areas have a negative impact on local green competitiveness; the distortion of the factor market has weakened the effect of environmental regulation on the promotion of green competitiveness. Such measures as reducing the resource mismatch effect, the suppressive effect on industrial upgrading and the lock-in effect on technology that caused by distortion of the factor market, and releasing potential dividends from the reform of factor market, are the keys to give full play to the effect of environmental regulation on the promotion of green competitiveness. Therefore, a necessary condition for enhancing the green competitiveness is to further deepen the market-oriented reform of factor market, to strengthen the environmental regulations in accordance with the law, and to form a co-ordinated internal and external “dual engine” composed of the market and the government.

Key words: environmental regulation, distortion of factor market, green competitiveness, spatial simultaneous equation model