Environmental regulations and firms' trade-offs between innovations: Empirical evidence from the quasi-experiment in China.

Abstract

This paper uses firm-level panel data to study the quasi-experiment of China's low carbon city (LCC) pilots and to estimate the dynamic impact of environmental regulations on firms' trade-offs between green innovation and digital innovation. The results indicate that environmental regulations lead to an increase in firms' green innovation in the short run and promote firms' digital transformation in the long run. Moreover, the key factors influencing firms' trade-offs are their size and the pollution levels of their primary businesses, highlighting the importance of both capability and immediacy for firms when making decisions. Furthermore, the event study shows that environmental regulations initially impact firms' profits in heavily polluting industries in the short run. However, environmental regulations can gradually enhance those profits in the long run by reducing marginal costs and upgrading industrial structures in treated regions. This paper provides insights for a deeper understanding of firms' heterogeneous choices and dynamic effects of innovation behaviors.