Does Environmental Regulation Induce Green Innovation? Evidence from Chinese Listed Firms

Abstract

Using a panel dataset of Chinese listed firms during the 1990-2010 periods, this paper investigates whether environmental regulations induce firms to develop innovation in environmentally friendly technologies. Environmental regulation chosen in this paper is Cleaner Production Audit (CPA) programs implemented in China. Using a difference-in-difference (DID) method, our findings suggest that there is a positive regulation effect on green innovation. The innovation-induced effect is more pronounced in encouraging radical green innovations measured by environmental invention patents than incremental green innovation measured by environmental utility patents. Furthermore, we investigate the moderating effects of industrial pollution intensity and firm’s ownership. For firms belonging to pollution intensive sectors, the impacts of this regulation on green innovation, both incremental and radical, are much stronger. The moderating effect of firm ownership, however, is not supported, suggesting that state-owned enterprises (SOEs) and non-SOE firms have no statistically significant differences in environmental innovation in response to the CPA programs.