The contagion effect of upstream firms’ environmental misconduct on downstream firms’ green innovation

Abstract

Using data from Chinese listed firms (2007–2023), we find that upstream suppliers’ environmental misconduct significantly undermines both the level and the persistence of downstream firms’ green innovation. We show that this effect (i) operates through tighter financial constraints and reduced R&D investment in downstream firms; and (ii) is amplified by higher supplier concentration and closer geographical proximity, especially in the presence of direct high-speed rail links. We provide additional supporting evidence by exploiting China’s 2015 revision of the Environmental Protection Law: after the reform, suppliers’ environmental misconduct declines and downstream green innovation strengthens, with the improvement attenuated among downstream firms linked to misbehaving suppliers. Our results underscore the importance of integrating environmental due diligence into supply-chain governance to sustain green innovation.

Keywords: corporate green governance, supply chain information transmission, environmental misconduct, green innovation, financial constraints