The internal and external effects of air pollution on innovation in China

China is now the world’s largest energy consumer, but severe air pollution problems have brought greater pressure to the production and development of its domestic economy. As an unavoidable result of air pollution, PM2.5 emissions are increasing. Previous literature has focused more on the impact of PM2.5 on the micro-level such as resident health and company location, yet macro-pattern studies between PM2.5 and innovation are inadequate. To bridge this gap, our research uses a spatial dynamic panel data model to systematically investigate the internal and external effects of PM2.5 concentration on innovation in China during the period 2001–2016. After forming a dataset of real-time PM2.5 concentration from satellite detection and using an innovation index instead of patents, we find a stronger spatial linkage between PM2.5 concentration and innovation. Thus, PM2.5 inhibits regional innovation significantly, and this result still exists after using the air mobility index as an instrument variable to alleviate endogenous problems. Lastly, PM2.5 concentration in neighboring regions also impedes local innovation considerably, indicating a spatial ripple effect of PM2.5.