CS

1-s2.0-S0140988324006790-main

Corporate Green Innovation and Environmental Regulation

  • Authors: Dan Peng (Business School, Nanjing University) & Qunxi Kong (School of Industrial Development, Nanjing University of Finance & Economics)

  • Contact: kongqunxi@163.com

  • Keywords: Environmental regulation, Corporate green innovation, Greenwashing, ESG

Abstract

  • China's economy has shifted focus from rapid growth to quality, efficiency, and sustainability.

  • Balancing environmental protection and promoting a green economy is increasingly important.

  • The study examines how environmental regulation affects corporate green innovation, analyzing data from 2007 to 2019.

  • Findings:

    • Environmental regulations positively impact green innovation in companies.

    • Corporate greenwashing and ESG performance serve as mediating factors.

    • The effect of environmental regulation varies depending on economic conditions, firm ownership, and industry.

1. Introduction

  • China's rapid industrialization has resulted in high carbon emissions, accounting for nearly 30% of global emissions (3-fold increase from 2000 to 2019).

  • Environmental degradation necessitated stronger regulatory efforts by the government, such as the 13th Five-Year Plan.

  • Debates exist concerning:

    • The potential of strict regulations to drive innovation (Porter and Linde, 1995).

    • Criticism of regulations leading to greenwashing (York and Rosa, 2003).

Green Innovation Importance

  • Green innovation is crucial for achieving high-quality economic growth.

  • Mixed scholarly findings necessitate further studies on optimizing environmental regulation for fostering genuine green innovation.

2. Research Hypotheses Development

2.1. Environmental Regulations and Green Innovation

  • Environmental regulations drive corporate green innovation through the "innovation compensation effect."

  • Hypothesis 1:

    • Environmental regulations can promote corporate green innovation.

2.2. Greenwashing Impacts

  • Greenwashing can emerge as a response to stringent regulations.

  • Hypothesis 2:

    • Environmental regulations may lead to greenwashing, which paradoxically aids green innovation.

2.3. ESG and Green Innovation

  • Environmental regulations and ESG ratings push companies towards sustainable practices.

  • Hypothesis 3:

    • Regulations pressure companies to fulfill ESG responsibilities, spurring green innovation.

3. Research Design

3.1. Data Source

  • Analysis of Chinese listed companies (2009-2019) from CSMAR, patent data from CNIPA, and city-level statistics.

  • Final sample: 3174 firms with 20,489 observations.

3.2. Variable Descriptions

  • Green Innovation (GreenPatent): Measured as log of green patent applications.

  • Environmental Regulations (EEFI): Index of pollutant emissions at the prefecture level, with lower values indicating stricter regulations.

  • Mechanism Variables: ESG ratings and Greenwashing score based on corporate governance actions.

  • Control Variables: Firm size, ownership structure, cash flow, etc.

4. Empirical Results and Discussion

4.1. Unit Root Test

  • Results confirmed stationarity of variables ensuring reliability for regression analysis.

4.2. Baseline Regression Results

  • Significant positive effect of environmental regulation (EEFI) on green innovation (GreenPatent).

  • Findings:

    • Environmental regulation increases green innovation by approximately 0.0840 units.

4.3. Robustness Checks

4.3.1. Instrumental Variable Method

  • Utilized to offset bias from causality and omitted variables.

  • Results indicated consistent promotion of green innovation due to environmental regulation.

4.3.2. Sample Adjustments

  • Analysis adjustments indicate environmental regulations continue to impact green innovation, emphasizing those after 2012 when stricter regulations were enforced.

5. Mechanisms and Heterogeneity Discussion

5.1. Mediating Effects

  • Greenwashing was shown to mediate the relationship between environmental regulation and green innovation.

5.2. Heterogeneity Analysis

  • Government Intervention: Impact varies based on intervention levels; more significant under lower intervention.

  • Corporate Ownership: Private enterprises showed positive impacts while state-owned firms faced regulatory burdens.

  • Energy Sector: Regulations positively affected innovation more in energy and new energy firms compared to non-energy firms.

6. Conclusion and Outlook

  • Environmental regulations effectively foster green innovation among Chinese enterprises.

  • Greenwashing and ESG performance are crucial mediating factors.

  • The effects of regulations differ based on market conditions, ownership structure, and industry.

Recommendations

  • Policymakers should tailor environmental regulations to convert stringent compliance into incentives for innovation.

  • Investment in green technology R&D should be increased alongside reduced greenwashing practices to support genuine green innovation.