Environmental regulation and technological innovation: evidence from China

We analyze the real effects of the environmental regulation on technological innovation using an air pollution reduction governance policy promulgated in China under the 12(th) Plan in 2012. We treat the Air Pollution Prevention Policy as a quasi-natural experiment that is plausibly exogenous to the firms' innovation policy and thus 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. Collectively this study's policy implication is that industrial policies that promote greener environments can enhance economic performance.