Environmental regulation and corporate R&D investment—evidence from a quasi-natural experiment

By Jingchang Huang, Jing Zhao, June Cao. International Review of Economics and Finance, 2021

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Abstract The question of whether environmental regulation stimulates innovation activities has long been important and controversial. This study explores an ideal setting, the low-carbon city pilot program conducted by the Chinese government as a quasi-natural experiment to address this question. We conduct a difference-in-differences approach to analyze the impact of environment regulation on R&D investment. We find that the program's adoption has led to an increase in R&D investment of 0.145% as a percentage of total assets and 0.273% as a percentage of sales, indicating a positive effect of environmental regulation on R&D expenditures. The increase in R&D expenditures is greater for firms experiencing a larger increase in government subsidies, a greater decline in corporate tax or a greater improvement in financial condition following the low-carbon pilot program. A series of robustness tests support a causal interpretation of our findings and indicate that the observed effect of the low-carbon pilot program on corporate R&D investment is unlikely driven by chance. Our results provide in-depth insights into the economic consequences of low-carbon regulation policies which could be of interest to academic researchers and policymakers.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/3a4e567f9a2880d51cefd2db5c1c69dc2c31159a