Does environmental regulation spur innovation? Quasi-natural experiment in China

Abstract

The relationship between stringent environmental regulation and the innovation capability of enterprises has been controversial. Treating the target-based sulfur dioxide emissions control policy implemented for the Two Control Zones after 2000 as a quasi-natural experiment, we exploit the difference-in-difference approach to investigate the causal relationship between stringent environmental regulation and technological innovation using the disaggregated Chinese manufacturing firm-level data between 1998 and 2007. Our estimation results indicate that the target-based environmental policy effectively limits the sulfur dioxide emissions of regulated enterprises and facilitates their technological innovation capability. The conclusion that strengthening environmental regulation has contributed to the technological innovation capability of enterprises is still robust after ruling out the effect of China’s integration into the World Trade Organization. However, enterprises with different characteristics might respond heterogeneously to strict environmental regulation. The estimation results of the difference-in-difference-in-difference confirm that heavily polluting enterprises and those exposed to greater environmental protection pressure have experienced more technological progress. Further analyses demonstrate that enterprises’ technological innovation triggered by strict environmental regulation dramatically reduces their non-clean energy consumption and improves their environmental performance. Our research sheds light on the causal relationship between environmental regulation and technological innovation and provides crucial references for governments within developing economies to design scientific environmental policies aimed at searching for win–win solutions for economic growth and eco-environmental protection.