The Effect of Internal Control on Green Innovation: Corporate Environmental Investment as a Mediator

The increasing focus on environmental, social, and corporate governance (ESG) has led to a growing interest in how firms’ internal behaviors affect their contributions in promoting sustainable economic development and fulfilling social responsibility. While previous studies have often explored the impact of internal controls on corporate investment decisions, little attention has been paid to the impact of internal controls on corporate green innovation. To this end, we explored the relationship between internal control, environmental investment, and green innovation using data from 2014–2019 for A-share listed companies in Shanghai and Shenzhen, China. The regression results show that there is a significant positive relationship between internal control and corporate green innovation. The improvement of internal control has a significant positive impact on firms’ active adoption of environmental protection investment. Environmental investment plays a partially mediating role in the process of internal control’s influence on green innovation. This implies that the effect of internal control on green innovation further affects green innovation through the indirect effect of environmental investment, in addition to the direct effect. Moreover, through further research, we find that the above influence relationship is significantly present in both heavily polluting and non-heavily polluting enterprises, as well as in state-owned and private enterprises, but is more significant in heavily polluting firms and private firms. Finally, this study responds to the debate on whether internal controls inhibit or promote enterprise innovation. We advocate further research on this issue in the future in terms of the differences in the accountability systems and customs of firms’ decision-making in different countries.