Liberalization of upstream productive services and green innovation in downstream manufacturing firms: Evidence from China

The interplay between openness and green development is a critical issue for developing countries. This article leverages Chinese foreign investment liberalization policies in productive service industries to construct a relatively exogenous index of productive service sector liberalization and uses micro-level data from Chinese manufacturing firms to empirically examine the causal economic implications of productive service liberalization on green innovation in downstream manufacturing firms. The findings indicate that liberalization of the productive service sector boosts green innovation in manufacturing firms. Moreover, the liberalization of the productive service sector enhances green innovation in downstream manufacturing enterprises mainly by enhancing management efficiency, reducing costs, and alleviating financing constraints. The extent of this impact varies according to the geographic location, industry attributes, and other firm-specific characteristics. Furthermore, the presence of stringent environmental regulations and strong intellectual property protection enhances the advantages of liberalizing the productive services on green innovation.