Environmental regulation and green innovation of polluting firms in China

The main objective of this paper is to study the impact of the Ambient Air Quality Standard (2012) on the green innovation of Chinese firms in polluting industries. The analysis features “leverage effect” of Porter Hypothesis imposed by environmental regulations and exploits exogenous variations caused by the promulgation of the new policy. Based on the exogenous variations, this paper uses the time varying PSM-DID method. The findings of this study suggest that the implementation of the new policy improves firms’ green innovation. Increments in R&D investment and environmental protection investment are channels through which the new standard positively affects firms’ green innovation. The cross-sectional heterogeneity analysis exhibits that the effect of this environmental regulation is stronger for firms with bigger size and lower financial constraints. The contribution and significance of this study are as follows: our study enriches understanding of the impact of environmental regulation on firms’ green innovation by empirically confirming the influencing channels of the impact of environmental regulations on green innovation. In addition, this paper contributes to the firms’ green innovation literature by empirically validating the role of corporate characteristics in moderating the effect of environmental regulations.