Environmental regulations and firms' green innovations: Transforming pressure into incentives

• Published in: International review of financial analysis 2023-03, Vol.86, p.102504, Article 102504
• Main Authors: Zhou, Peng, Song, Frank M., Huang, Xiaoqi
• Format: Article
• Language: English
• Subjects: Environmental quality; Environmental regulations; Green innovations; Inventors' productivity; Survive and exit
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2023.102504

Considering China's Eleventh Five-Year Plan as a quasi-natural experiment, this paper identifies the effect of environmental regulations on green innovations with a difference-in-difference-in-differences (DDD) strategy. We find that: (1) environmental regulations promote both the quantity and quality of firms' green innovations, which are measured by patent counts and citations respectively. This effect is more salient for firms in regions with higher regulation intensity and firms in industries with higher pollution intensity. (2) Firms with greater pressure from environmental regulations are more likely to conduct green innovations, which is mainly reflected by the increased innovation efficiency of retained inventors. (3) Environmental regulations have a crowed-out effect, resulting in some firms exiting the market or migrating from high-pollution industries to low-pollution industries. (4) Environmental regulations improve firm performance in the long run and are conducive to the improvement of local environmental quality. This paper provides implications for regulators concerning environment and innovation. •By reconsolidating Zero-Sum Hypothesis and Win-Win Hypothesis, we argue that firms may transfer pressure into incentives or exit.•Based on the DDD strategy, we find that environmental regulations promote both the quantity and quality of green innovations.•It is more salient in regions with higher regulation and industries with higher pollution intensity, and greater as the assessment approaches.•Firms with greater pressure to survive are more likely to conduct green innovations. Some are forced to migrate or exit.•Environmental regulation improves firm performance in the long term. Besides, it also has obvious environmental performance.