Regulations, politics, and firm green innovation

We examine impacts of environmental regulations and political incentives on firms’ green innovation. By exploiting a natural experiment on reduction of sulfur dioxide (SO2) emissions in China, we show that the environmental regulation significantly enhances firms’ green innovations. For 1% increase in provincial SO2 reduction targets, there is average 1.77% (2.67%) increase in green patent amount (quality). A plausible mechanism driving our findings is that target-based performance evaluation in political promotion may properly motivate local bureaucrats to exert pressures on firms to implement environmentally friendly innovations. However, local bureaucrats’ political turnover and short-term pressures of economic growth negatively moderate our findings. Our findings are more pronounced to state-owned, non-financing constrained firms and firms under eastern provinces or SO2-filled industries.