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.