Do heterogenous subsides work differently on environmental innovation? A mechanism exploration approach

Abstract

Understanding the relationship between subsidies and environmental innovation, while accounting for the heterogeneous impacts of subsidies on different types of firms, can help to evaluate the impact of existing subsidy policies and provide suggestions for future policies. In this paper, we construct a listed-firm-level panel database for China, which contains fundamental information and data on environment, sustainability and governance (ESG) for the period 2013–2019. In addition, we explore how government subsidies and environment-oriented subsidies impact environmental innovation and the mechanisms involved. We find that the subsidies have significant and positive impacts on green innovation for all our research samples; however, cleaner production firms receive significantly greater benefits from subsidies than heavily-polluting firms. Besides, environment-oriented subsidies have a significant and positive effect on both heavily polluting and cleaner production firms. In addition, general subsidies and environment-oriented subsidies both improve environmental innovations for cleaner production firms regardless of the level of financial constraints, while they only help alleviate financial constraints and contribute to environmental innovation for heavily-polluting firms that are highly financially constrained. Moreover, we uncover the greenwashing mechanisms that conceal the impact of environmental subsidies and help explain the low efficiency of usage of subsidies for environmental innovation.