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This paper investigates the impacts of stringent environmental regulation of firm‐level upstreamness in the global value chains (GVCs). Specifically, we use the non‐uniform promulgation of local water pollution control regulations across cities and over time after the 11th Five‐Year Plan as a quasi‐natural experiment in China, in which firms are forced to adopt cleaner technologies or equipment to reduce pollution after enforcing tighter environmental standards. Using highly disaggregated firm‐level data between 2008 and 2014, we find that firms in cities with stricter water pollution regulations tend to move to more upstream sectors in the GVCs. We find that this effect is more prominent for low‐productivity firms, high‐polluting firms, and firms with a high dependence on water in production. This paper sheds new light on the GVC upgrading of firms in response to environmental regulation changes.