Distance makes a difference: The role of water pollution regulation on firms’ innovation in China

Throughout the imminent water crisis era and stringent water environment management, enterprises play a vital role in environmental governance. However, there is seldom analysis on how the water environment regulation influences an enterprise's innovation due to data deficiency. Using our database from 2000 to 2022, we combine geographic information from water quality monitoring stations with the data on listed companies in China to pinpoint what distance firms are exposed to the monitoring stations. Results from a spatial regression discontinuity design along the geographic distances demonstrate that water environmental regulation has a significant positive impact on the quantity and quality of enterprise innovation. This paper found that it is primarily driven by the decreased usage of intermediate goods, rising industry profits from the exit of low-productivity firms, and enhanced enterprise research and development (R&D) investment. Furthermore, the positive impact is more pronounced for privately-owned firms, firms closer to suppliers, polluting firms, and politically unaffiliated firms. Our study offers scientifically valuable insights for emerging market countries in formulating effective water environmental regulation policies to incentivize firms to innovate in environmental protection. Additionally, it provides novel ideas on synergizing water environmental regulation and firm innovation to foster a mutually beneficial relationship between environmental protection and sustainable development.