Suppliers’ decision on green innovation: A response to customers’ environmental regulation

Abstract

This study examines whether customers’ environmental regulation (ER) affects suppliers’ green innovation. Relying on a unique dataset of customer–supplier relationships among listed firms in China, we demonstrate that suppliers’ green innovation increases in response to intensified ER pressure faced by customers. This finding holds even when considering alternative proxies of green innovation and ER, and an alternative sample. We also demonstrate that the impact of customers’ ER on suppliers’ green innovation is positively correlated with customers’ bargaining power. Our results contribute to the growing research on the crucial role of the supply chain in firms’ decision making processes.