Green with Competitors? The Effect of Green Factory Peers on Green Innovation

Abstract

Using the exogenous shock of China’s green factory policy, which allows firms to apply for government certification as a green factory, we examine how firms that are not certified as a green factory (focal firms) respond to their green factory peers in the context of green innovation. Consistent with the crowding-out effect explanation, we find that focal firms’ green innovation is negatively associated with the number of green factory peers in the industry. Our results are robust to an array of robustness tests and different patent quality metrics. Our channel tests suggest that fewer governmental subsidies and procurement orders, higher financial constraints and cost of debt, lower production and sales, and higher green corporate capital investment explain the findings. Furthermore, we find that green factory firms reduce industry competition while increasing the concentration of policy support from the government. Overall, green factory firms leverage government help, use their better endowment, and engage in practices to crowd out focal firms in the same industry. Our findings offer a novel explanation of how green factory firms influence the green innovation of industry competitors, thereby highlighting the negative externalities of the green manufacturing policy.

Keywords: Green factory, green manufacturing, Green innovation, crowding‒out effect, spillover effect, peer effect