According to the Porter Hypothesis, well-designed environmental regulations may lead, counter to established wisdom, to increased innovation and productivity as firms reduce pollution and make optimal production decision changes. Finding the causal relationships between environmental regulation, firms’ innovation, and competitiveness is challenging. As a result, researchers continue to find inconsistent evidence concerning the Porter Hypothesis. In this thesis, we examine the influence of a national air pollution control policy on innovation and labor productivity at the industry-city level in China using a firm-level panel dataset from 1999 to 2009. We analyze this policy as a quasi-natural experiment using propensity score matching and difference-in-difference analysis. We find that environmental regulations stimulated industrial innovation in China, supporting the weak Porter Hypothesis. Regarding the validity of the strong Porter Hypothesis in this case, the translation of these new innovative practices into labor productivity increases hinges upon firm and industry characteristics. Both patent applications and labor productivity significantly increased in industries where more firms were entering. In industries where entry and exit were minimal, the increase in innovation was concentrated among private firms with small positive profits, and the rise in labor productivity was concentrated among private firms with low pollution levels.