Does environmental regulation spur innovation? Quasi-natural experiment in China

The relationship between stringent environmental regulation and the innovation capability of enterprises has been controversial. Treating the target-based sulfur dioxide emissions control policy implemented for the Two Control Zones after 2000 as a quasi-natural experiment, we exploit the difference-in-difference approach to investigate the causal relationship between stringent environmental regulation and techno-logical innovation using the disaggregated Chinese manufacturing firm-level data between 1998 and 2007. Our estimation results indicate that the target-based environmental policy effectively limits the sulfur dioxide emissions of regulated enterprises and facilitates their technological innovation capability. The conclusion that strengthening environmental regulation has contributed to the technological innova-tion capability of enterprises is still robust after ruling out the effect of China's integration into the World Trade Organization. However, enterprises with different characteristics might respond heterogeneously to strict environmental regulation. The estimation results of the difference-in-difference-in-difference confirm that heavily polluting enterprises and those exposed to greater environmental protection pres-sure have experienced more technological progress. Further analyses demonstrate that enterprises' tech-nological innovation triggered by strict environmental regulation dramatically reduces their non-clean energy consumption and improves their environmental performance. Our research sheds light on the causal relationship between environmental regulation and technological innovation and provides crucial references for governments within developing economies to design scientific environmental policies aimed at searching for win-win solutions for economic growth and eco-environmental protection.& COPY; 2023 Elsevier Ltd. All rights reserved.

Automated summary

This study investigates the causal relationship between stringent environmental regulation and technological innovation in Chinese manufacturing firms between 1998 and 2007. The results suggest that target-based environmental policies effectively limit emissions and enhance firms' technological innovation capability. Furthermore, heavily polluting enterprises and those subject to greater environmental protection pressure experience more technological progress.