Environmental regulation and green innovation: Evidence from heavily polluting firms in China

This study examines the effect of environmental regulation on firms’ green innovation, as well as the heterogeneous effects among different firms. Using the sample of A-share listed firms in the heavy-polluting industry in China and the manually collected government-implemented environmental regulation from 2006 to 2018, we find strong evidence that environmental regulation has a significantly positive effect on firms’ green innovation. Further, our results show that environmental regulation has a more prominent effect on firms with poorer internal and external governance. In addition to promoting firm green innovation, environmental policies can benefit firms’ long-term development as well.