Extrusion Effect or Promotion Effect? The Effect of Environmental Regulation on Enterprise Green Innovation

Abstract

This paper took the policy of China’ Air Pollution Prevention and Control Action Plan as an exogenous shock to reflect the change in environmental regulation intensity. By matching environmental policies with micro data of listed companies in China, this paper explored the effect and mechanisms of environmental regulation on enterprise green innovation. Through constructing difference-in-difference (DID) and difference-in-difference-in-difference (DDD) models, we found the following to be the case: (1) Environmental regulation had a significant positive effect with the green innovation level of Chinese listed companies. (2) Compared with non-regulated industries, this policy has led to a significant increase (5.4%) in the amount of firms’ green patent applications in regulated industries, and the promoting effect was more obvious in key areas that are strictly controlled by this policy. (3) Compared with non-state-owned enterprises, it had a stronger impact on the green innovation of state-owned enterprises. (4) Mechanistic analysis showed that China’s environmental regulation can play a resource compensation effect by increasing environmental protection subsidies for enterprises’ green innovation behaviors. Additionally, it can force firms to increase investment in environmental pollution governance by raising pollution penalties, thus exerting the forcing effect. This paper provides new evidence for Porter’s hypothesis and can provide a reference for developing countries promoting green innovation through environmental policies and regulations.