Do governance patterns of environmental regulation affect firm's technological innovation: Evidence from China

Abstract

In China, the environmental governance patterns of local governments differ significantly. This study explores the possible relationship between environmental governance patterns and firm's technological innovation. It firstly develops a quantitative method to describe environmental governance patterns by decomposing the environmental regulation intensity index into Normalized Governance Index (NGI) and Passive Governance Index (PGI). Then, this study employs Chinese city-level datasets in 2011–2015 to estimate High-Dimensional Fixed Effect model with instrumental variable (IV). The results show that, first, environmental regulations of governments positively affect technological innovation. Second, NGI has a positive moderating effect on the relationship between environmental regulation and technological innovation, whereas PGI has a negative moderating effect. Third, two opposite forces induced by governance patterns can explain the inverted U-shaped Porter effect. The results suggest energy, environmental, and technological innovation policy implications, as stable and expectable environmental regulation can better promote industrial sector technological innovation given the Porter effect.