Environmental penalties and their spillover effects on green innovation: Dual perspectives of geographical and supply chain network proximity

Environmental penalties exert regulatory pressure that transcends organizational boundaries, triggering green innovation spillovers among spatial neighbors and supply chain partners. This study investigates these effects using a Ring-DID approach and panel data on Chinese listed firms from 2007 to 2022. The findings suggest significant spillover effects of environmental penalties on neighboring firms' green innovation, transmitted through geographic proximity and supply chain network proximity. Specifically, green patent applications increase by 7% for firms located in close geographical proximity to penalized companies, and by 10% for first-order supply chain neighbors. The findings remain robust to adjustments for treatment radius, sample selection bias, placebo tests, and other robustness checks. Moreover, there is a positive interaction between geographical and network proximity, which leads to an increase of over 60% in green patent applications when firms are both geographically close and supply chain connected. The mechanism analysis indicates that environmental attention and institutional investors positively moderate the spillover effect. Heterogeneity analysis examines variations across patent types, ownership structure, and industry market power to identify differences in spillover effects. This study provides critical insights for policymakers on how to leverage the powerful spillover effects of environmental regulations to foster broader green innovation.