Clean Development Mechanism and Knowledge Spillovers: Evidence from Chinese Firm-level Patent Data

Abstract

Under the Kyoto Protocol, Clean Development Mechanism (CDM) is expected to facilitate the North-South knowledge spillovers for climate-friendly technologies. This paper examines the effects of this voluntary international climate cooperation on firm innovation and knowledge spillovers through the lens of CDM projects hosted in China. Using a matched Difference-in-Differences (DID) approach, we find that CDM projects contribute to firms' innovation quantity, quality, and direction in renewable energy and energy-efficient technologies. These results can be explained by a rich set of project heterogeneity, capturing the learning-by-doing effect, the induced-innovation incentives, and the economics of scale. Furthermore, we explore the role of foreign sponsors in knowledge spillovers, measured by patent citations from sponsoring countries to the host country. Our results suggest that sponsoring firms play a technology-supporting role by raising the innovation quantity and quality while sponsoring governments serve as an intermediary role by facilitating citation flows.