Impacts of government subsidies and environmental regulations on green process innovation: A nonlinear approach

Abstract

With China's tremendous economic development following its reform and opening-up, the problem of environmental deterioration has become increasingly serious. To achieve a win-win situation between economic growth and environmental protection, enterprises are being encouraged to carry out green technology innovation, but due to the risks and uncertainties inherent in it, the government is providing research and development (R&D) subsidies while at the same time implementing environmental regulations. As the Organisation for Economic Cooperation and Development (OECD) [5] divides green technology innovation into green product innovation and green process innovation, this study focuses on the latter in order to better study its relationship with environmental regulations and government subsidies. We select panel data of 30 provinces and cities in China from 2009 to 2017 (excluding Tibet, Hong Kong, Macao, and Taiwan, because of a lack of data) and use the system GMM and threshold-effect model for empirical analysis. The results show that environmental regulations have a U-shape non-linear effect on green process innovation, while government subsidies have a positive role in promoting green process innovation, or the so-called leverage effect. Based on government subsidies, the impact of environmental regulations on green process innovation has a threshold effect, and therefore regulations and subsidies should be increased. In addition, the level of economic development has a U-shape effect of inhibition and then promotion on green process innovation. Overall, the China government should continue to develop its economy, but must not neglect the impact of environmental regulations on technological innovation at the expense of environmental damage.