Dark side of green subsidies: Do green subsidies to a focal firm crowd out peers’ green innovation?

Abstract

Many studies have shown that green subsidies can promote green innovation in recipient firms, but the impact of green subsidies to a focal firm on peer firms' green innovation remains understudied. To fill in this research gap, the current study uses data from 2,155 listed Chinese manufacturing firms and a multi-period difference-in differences approach to examine the impact of green subsidies to a focal firm on peer firms' green innovation. We find that such subsidies negatively affect peer firms' green innovation. Thereafter, we use the attention-based view to examine the role of regulatory focus (promotion and prevention focus) in the relationship between green subsidies and peer green innovation. We find that peer firms' promotion focus weakens the negative effect of green subsidies to a focal firm on peer green innovation, whereas peer firms' prevention focus aggravates this effect. Moreover, we examine the competitive mechanism through which green subsidies to a focal firm crowd out peer green innovation, finding that the crowding-out effect is more pronounced in peer firms with higher market concentration and greater product market share. We likewise investigate the heterogeneous effects of firm, industry, and regional characteristics on the relationship between green subsidies and peer green innovation. Results indicate that green subsidies to state-owned firms, mature firms, high-tech firms, and firms located in pilot low-carbon cities have considerably strong negative effects on peer green innovation. Our study challenges the prevailing view of environmental regulations' positive spillover effects on peer green innovation by highlighting green subsidies' “dark side.” We reveal the crowding-out effect of green subsidies to focal firms on peer green innovation, stimulating scholarly debate on their effectiveness and providing important implications for environmental policies’ enactment.