Does more stringent environmental regulation induce firms' innovation? Evidence from the 11th Five-year plan in China

Abstract

Using China's 11th Five-Year Plan as a quasi-natural experiment, we conduct a difference-in-differences strategy with firm-level data to examine how stricter environmental regulation affects firms' innovation. The main results show that more stringent environmental regulation induce patent application of industrial firms, validating the “Porter Hypothesis” in China. Moreover, further evidence also indicates that there are underlying heterogeneous effects with regards to types of ownership, industrial characteristics, and the sizes of firms. A battery of robustness checks enforces the consistency of our results. This study complements the literature related to the relationship between environmental regulation and firms' innovation behavior, and provides the direction and scientific basis for the future formulation of China's environmental regulation policies.