Environmental Regulation and the Innovation Performance of Chinese Export Firms: A Quasi-Natural Experiment based on the Law of Promoting Cleaner Production

Abstract

As China’s export products have been pollution-intensive in recent decades, stringent environmental regulations have been applied to export products. Environmental regulation will squeeze out a firm’s expense on innovation and impact its productivity through the cost effect and innovation offset effect. However, the overall impact on productivity change is uncertain because of the trade-off between the two effects. This study explores the relationship between the innovations of export firms and environmental regulation using the panel data of export firms in 18 industrial industries. The impact of the implementation of the Law of Promoting Cleaner Production on the innovation of export firms in industries with different pollution intensities has been studied using the difference-in-differences method. The findings show that environmental regulation has a negative impact on the innovation of export firms. Export destinations create a difference in innovation performance. Environmental regulation tends to have a positive impact on the innovation of firms whose major markets are developed countries. Compared with light pollution-intensive industries, the Law of Promoting Cleaner Production has reduced the innovation ability of export firms in heavy and medium pollution-intensive industries. Therefore, when formulating environmental policies, regulators should consider the impact of such policies on the innovation of export enterprises and formulate a reasonable intensity of environmental regulations to achieve a win–win situation vis-à-vis improving the ecological environment and enhancing the innovation ability of export enterprises.