Environmental regulations and firms' green innovations: Transforming pressure into incentives

Abstract

Considering China's Eleventh Five-Year Plan as a quasi-natural experiment, this paper identifies the effect of environmental regulations on green innovations with a difference-in-difference-in-differences (DDD) strategy. We find that: (1) environmental regulations promote both the quantity and quality of firms' green innovations, which are measured by patent counts and citations respectively. This effect is more salient for firms in regions with higher regulation intensity and firms in industries with higher pollution intensity. (2) Firms with greater pressure from environmental regulations are more likely to conduct green innovations, which is mainly reflected by the increased innovation efficiency of retained inventors. (3) Environmental regulations have a crowed-out effect, resulting in some firms exiting the market or migrating from high-pollution industries to low-pollution industries. (4) Environmental regulations improve firm performance in the long run and are conducive to the improvement of local environmental quality. This paper provides implications for regulators concerning environment and innovation.