Environmental regulation and green innovation: Evidence from China’s new environmental protection law

Abstract

This study investigates the impact of China’s new Environmental Protection Law on the green innovation behaviour of listed companies in high-polluting industries. The implementation of China’s strict and new Environmental Protection Law provides a quasi-natural experimental setting for examining the causal effect of environmental regulation on corporate green innovation. Based on data of the application for environmental patents of high-polluting firms listed in Shanghai and Shenzhen Stock Exchanges from 2010 to 2017, this study analyses the change in the green innovation behaviour of firms after the implementation of China’s new and stringent Environmental Protection Law using the PSM-DID approach. We find that firms tend to file more applications for environmental patents, including patents for inventions and utility models after the implementation of the new Environmental Protection Law. Further analysis shows that while this effect is stronger for state-owned enterprises, it is weaker for firms headquartered in cities where economies depend more on the secondary industry. Firms in concentrated industries have more incentive to file applications for green invention patents than those in competitive industries. The study has important implications for policy makers on better implementing the environmental protection law in developing countries.