Does more stringent environmental regulation induce firms' innovation? Evidence from the 11th Five-year plan in China

Using China's 11th Five-Year Plan as a quasi-natural experiment, we conduct a difference-in-differences strategy with firm-level data to examine how stricter environmental regulation affects firms' innovation. The main results show that more stringent environmental regulation induce patent application of industrial firms, validating the Porter Hypothesis in China. Moreover, further evidence also indicates that there are underlying heterogeneous effects with regards to types of ownership, industrial characteristics, and the sizes of firms. A battery of robustness checks enforces the consistency of our results. This study complements the literature related to the relationship between environmental regulation and firms' innovation behavior, and provides the direction and scientific basis for the future formulation of China's environmental regulation policies.

Automated summary

This study examines the impact of stricter environmental regulation on firms' innovation using China's 11th Five-Year Plan as a quasi-natural experiment. The results support the Porter Hypothesis, showing that stricter environmental regulation leads to an increase in patent applications by industrial firms in China. Furthermore, the study also finds heterogenous effects based on ownership, industrial characteristics, and firm size.