Environmental regulation and firm innovation: Evidence from National Specially Monitored Firms program in China

There is inconsistent conclusion on the relationship between environmental regulation and firm innovation. Moreover, the effect of environmental regulation under direct supervision of the central government on firm innovation remains to be verified. Treating the National Specially Monitored Firms program as a quasi-natural experiment, we employ the difference-in-difference method to study the impact of environmental regulation on firm innovation using firm-level data from 2004 to 2009. The results show that the National Specially Monitored Firms program has improved the innovation of regulated enterprises, which supports weak version of Porter hypothesis in China. We also find that this program mainly enhances the number of invention and utility model; and this positive impact is stronger in the north-eastern, eastern and central regions, as well as the state-owned, private, foreign, exporting and large firms, while there is an inhibitory effect on small enterprises. The inspection of mechanism indicates that the financial constraint is an important channel that affects firm innovation. •The National Specially Monitored Firms (NSMF) program has improved firm innovation.•The weak version of Porter hypothesis exists in China.•This positive effect may vary across patent types, regional, and firm’s characteristics.•The NSMF program affects corporate innovation through financial constraints.