Environmental Regulation and Technological Innovation : Evidence from China

Abstract

We analyze the real effects of the environmental regulation on technological innovation using a sample of Chinese firms. We leverage the Air Pollution Prevention Policy as a quasi-natural experiment that is plausibly exogenous to the firms’ innovation policy and use the difference in difference (DID) as an identification strategy in our analysis. We provide evidence that environmental regulation substantially promotes innovation productivity. Our findings reveal that this impact is more pronounced for state owned firms, pollution-intensive industries and high-tech intensive industries. We uncover three possible underlying economic mechanisms through which the air pollution reduction policy impacts innovation. We show that government financing, external governance from the capital market and R&D intensity are three underlying economic channels through which environmental regulation promotes technological innovation.

Keywords: Air pollution, China, Environmental regulation, Innovation, Porter hypothesis, High-tech

JEL Classification: Q52 Q58 O32