Air pollution and corporate innovation: incentive or resistance? Evidence from regression discontinuity.

Abstract

The potentially serious economic consequences of China's severe air pollution problem cannot be overlooked, especially the impact on corporate innovation, which is a core driver guiding firms towards efficient and high-quality development. However, the existing literature has more often investigated the effect of pollution on corporate innovation from the perspective of environmental regulation, while relatively little research is available directly from the perspective of air pollution. In this study, for better causal identification and endogeneity treatment, we consider the Qin ling Mountains-Huai River heating policy as a quasi-natural experiment and explore for the first time the causal effect of air pollution on Chinese industrial firms' innovation through a geographical regression discontinuity (RD) approach. The results find that air pollution has a significant inhibitory effect on the industrial firms' innovation, especially for green innovation, where the innovation of state-owned enterprises, high pollution, and low monopoly firms are more sensitive to pollution. Specifically, a 1% increase in PM2.5 emissions leads to a 0.803% reduction in the corporate total innovation, a 0.924% reduction in invention patents, a 0.574% reduction in utility model patents, and a 1.087% reduction in design patents. We have verified the robustness of this core finding through a series of robustness checks including adjustment bandwidth, IV estimation, and placebo test. Further to this, we find that air pollution may negatively affect corporate innovation through three channels: crowding out R&D investment, reducing total factor productivity (TFP), and reducing labor supply and the proportion of highly skilled employees. This study sheds light on the severe losses caused by air pollution on corporate innovation capabilities at the micro-level, deepening the understanding of the economic harm caused by air pollution. This suggests that as firms strive to improve their innovative capacity and competitiveness, they should also be aware of environmental protection and green development; otherwise, unnecessary losses in innovation dynamics will be incurred.