Environmental fees, local competition, and corporate green innovation activities: evidence from China

Abstract

ABSTRACT The authority has moved away from using GDP as the sole measure of local government performance, placing new emphasis on environmental governance, tax administration, and technological innovation. This shift has spurred competition among local governments, prompting the need to examine the relationship between government competitive behaviour and firms’ green innovation. The study uses panel data from 2007 to 2020 and presents a comprehensive research-based explanation of how local government competition affects firms’ green innovation activities under China’s fixed and floating environmental tax and fee systems, applying the causal forest algorithm. The results show that local government competition suppresses green innovation under the floating system, but stimulates it under the fixed system. Further analysis shows that the floating system’s relatively higher national environmental governance tax and the increased competition under the floating system increase firms’ operating costs, leading to a ‘crowding out effect’ on green innovation. Conversely, under the fixed system, increased competition among local governments reduces operating costs, promotes investment in green innovation, and creates a ‘leverage effect’.