The threshold effect of political connection on the green innovation of businesses: Evidence from China

Abstract

It is increasingly accepted that green innovation plays a crucial role in the new development pattern. Despite the government’s efforts to promote green innovation in China, the efficiency of such initiatives is still inadequate. Therefore, it is essential to investigate how political connection affect the green innovation process of businesses, so as to better guide the government’s role, stimulate green innovation in businesses, and ultimately support sustainable economic and social progress. Drawing on the data of A-share listed companies in China from 2010 to 2020, this article empirically examines the influence and mechanism of political connection on green innovation of enterprises. The findings indicate that political connection can reduce the financing constraints for businesses, however, it can also stimulate the motivation for rent-seeking, which means that resources are used to meet government expectations or satisfy management’s private desires, thus crowding out innovation resources and eventually having a negative effect on innovation. Evidence suggests that the influence of political connection on green innovation in companies has a limit based on resource investment and allocation decisions. When resource investment reaches a certain point, green innovation can be significantly enhanced; however, if the resources allocated for social responsibility reach a particular threshold, political connection can adversely affect green innovation. This article proposes that strengthening both internal and external governance can mitigate the agency problems of executives and reduce the negative impact of political connections on green innovation within businesses. By delving deeper into the relationship between political connections and green innovation, this article offers new insights and policy recommendations aimed at fostering green innovation in enterprises.