Exploratory or exploitative green innovation? The role of different green fiscal policies in motivating innovation

Abstract

This study aims to explore how green fiscal policies influence different types of green innovations and to identify the most effective fiscal instruments for incentivizing each innovation type. To this end, we apply the innovation ambidexterity framework to green innovation and investigate the impacts of two green fiscal policy instruments, green subsidies, and effluent charges, on firms' innovation decisions. We construct a unique firm-level panel dataset by linking data of Chinese publicly listed companies to patent datasets. By developing an econometric model and employing fixed-effects regression and instrumental variable regression methods, we find that green subsidies promote exploratory green innovation significantly, whereas effluent charges are more likely to incentivize firms to pursue exploitative green innovation. Furthermore, we confirm that firms' choices in response to green fiscal policies vary according to their innovation capabilities and the intensity of market competition. Our findings provide a new perspective for understanding the debate surrounding the Porter Hypothesis and offer significant policy implications for motivating green innovation in developing countries.