Fiscal Decentralization and Green Innovation - Evidence from Listed Firms in China

Abstract

This paper takes the reform of "Province-Managing-County(PMC)" as a natural experiment, utilizes the data of listed enterprises and green patent data from 2007 to 2019, and applies the method of the difference-in-differences(DID) to investigate the impact of fiscal decentralization on enterprises' green innovation. The study finds that the PMC reform makes the green innovation of enterprises decrease by 27.34%, and this phenomenon is more significant in state-owned enterprises and non-heavy pollution industries. The main mechanism lies in the fact that local governments, in pursuit of economic development, reduce the amount of sewage charges paid by enterprises and lower the entry threshold of enterprises, and at the same time, this behavior influences the decision makers of enterprises to reduce the amount of environmental protection investment of enterprises. Additionally, the study found that government environmental protection subsidies can ease financial constraints on enterprise green innovation, mitigating the inhibitory impact of PMC reform. The paper advocates shifting from a traditional rapid economic development model to embracing green development, integrating it into core government management, and methodically advancing fiscal decentralization reform.