Do environmental subsidies spur environmental innovation? Empirical evidence from Chinese listed firms

•We investigate the impact of environmental subsidies on environmental innovation.•Environmental subsidies significantly boost environmental management innovation.•Environmental subsidies do not show significant effect on environmental technology innovation. Although one of the main reasons why governments offer environmental subsidies to firms is to encourage environmental innovation, the effectiveness of such measures is unclear. In this study, we examine the effects of subsidies on firms’ environmental innovation activities (i.e. environmental technology innovations and environmental management innovations). We use fine-grained panel data on Chinese listed manufacturing companies over the period 2011–2015. We find that whilst Chinese government environmental subsidies boost firms’ environmental management innovation significantly, their effect on environmental technology innovations is not statistically significant. We employ an instrumental variable two-stage least squares (IV-2SLS) approach to handle potential selection bias. We find also that there is no statistically significant relationship between firms’ environmental management innovations and environmental technology innovations. These findings hold for a range of robustness tests.