Capital generates green: Evidence from China's national innovation system policy

Abstract

A national innovation system (NIS) is instrumental in enhancing a country's innovation potential, with its system effectiveness largely contingent upon the development of financial markets. The impact of financial innovation within the NIS framework has yet to be thoroughly investigated despite this connection. This study exploits a recent policy shock in China that includes financial innovation as part of national supply-side reform. A difference-in-differences analysis reveals that firms in areas with greater financial innovation have exhibited a significant increase in green innovation following this policy. Mechanism analyses show that, after the policy shock, financial innovation has increased firms' long-term loan ratio and credit loan ratio while reducing the cost of debt, thereby improving corporate maturity match and reducing their propensity to resort to short-term debt for long-term investment projects. These results provide novel insight into how NIS-integrated financial innovation enhances system effectiveness and promotes green innovation.