Both　developed　and　developing　countries　have　introduced　various　policies　to　require　enterprises　to　protect　environment　by　providing　green　products　and　service.　However,　environmental　protection　is　often　seen　as　an　obstacle　to　business　development.　Professor　Michael　Porter　put　forward　that　this　dilemma　can　be　alleviated　through　innovation.　Environmental　regulation　can　enhance　firms’　competitiveness　by　spurring　their　innovation.　It　is　well　known　as　the　Porter　Hypothesis　which　has　been　examined　in　many　previous　studies.　However,　existing　empirical　evidence　still　remains　inconsistent.　To　reconcile　the　inconsistent　result,　this　study　proposes　a　nonlinear　mediating　model　for　the　Porter　Hypothesis　from　a　holistic　perspective.　Based　on　Chinese　industry-level　panel　data　of　35　industrial　sectors　between　2001　and　2010,　the　empirical　results　show　that　environmental　regulation　has　a　nonlinear　effect　on　innovation;　and　innovation　shows　a　nonlinear　association　with　competitiveness.　Generally,　innovation　plays　a　full　and　nonlinear　mediating　role　in　relationship　between　environmental　regulation　and　competitiveness.　This　study　reveals　the　relationships　among　environmental　regulation,　innovation,　and　firms’　competitiveness,　which　helps　government　to　formulate　policies　and　firms　to　develop　sustainably.　©　2020,　The　Editor(s)　(if　applicable)　and　The　Author(s),　under　exclusive　license　to　Springer　Nature　Switzerland　AG.