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Environmental regulation and indirect innovation effects along supply chain: Evidence from China's water pollution prevention and control action plan

Author

Listed:
  • Du, Kerui
  • He, Kaixi
  • Yao, Xin

Abstract

Conventional wisdom holds that environmental regulation directly spurs innovation within polluting firms, enabling them to comply with standards while boosting competitiveness. Using China's Water Pollution Prevention and Control Action Plan as a quasi-experiment, we ask instead whether regulation primarily induces innovation in regulated firms or in their upstream suppliers. We find no statistically significant increase in water-related green patenting among regulated polluters, but a pronounced rise among their upstream suppliers. This upstream response is stronger in regions with higher wastewater discharge intensity, greater innovation capacity, and stronger intellectual property protection, and is concentrated among competitive, non-state-owned, and larger firms. Innovation mainly targets pollution control rather than preventive technologies. Regulated firms comply chiefly by purchasing external abatement solutions, rather than through knowledge spillovers that enhance their own inventive activity. These findings reveal a demand-driven supply-chain channel through which environmental regulation reshapes the locus and direction of green innovation by creating markets for environmental technologies.

Suggested Citation

  • Du, Kerui & He, Kaixi & Yao, Xin, 2026. "Environmental regulation and indirect innovation effects along supply chain: Evidence from China's water pollution prevention and control action plan," China Economic Review, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:chieco:v:99:y:2026:i:c:s1043951x26000805
    DOI: 10.1016/j.chieco.2026.102730
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    Keywords

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    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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