Is environmental regulation an incentive or an obstacle to green innovation?

Abstract

To investigate the validity of the Market Failure Theory and Porter Hypothesis, this paper utilizes a hand-collected novel dataset from manufacturing firms form 2010 to 2020, presenting empirical evidence on how different types of environmental regulations influence green innovation and assessing the moderating effect of government subsidies. The conclusions demonstrate that mandatory environmental regulation reduces green innovation, whereas voluntary environmental regulation stimulates it. Government subsidies mitigate the negative influences of mandatory environmental regulation on green innovation but cannot have an impact on the positive effect of voluntary environmental regulation on green innovation. Additionally, mandatory environmental regulation affects green innovation in the long term, whereas voluntary environmental regulation yields only transient impacts confined to the immediate subsequent year. Finally, the influences of environmental regulations are heterogeneous, varying according to firm age, industry, and region. The conclusions support the Porter Hypothesis and Market Failure Theory, providing policy implications for policymakers, firm managers, and investors.