Environmental regulation policy, firm endogenous capability, and green technological innovation: Evidence from a multi-period DID study in heavily polluting industries

Abstract

Although the global shift toward sustainable development is gaining momentum, there remains a lack of systematic empirical evidence on whether and how differences in firm endogenous capability moderate the effectiveness of environmental regulation policy (ERP) in promoting green technological innovation (GTI). This research analyses 1434 A-share listed companies in China's highly polluting industries utilizing panel data from 2013 to 2023 and applying a multi-period DID model to assess the effect of ERP on corporate GTI. To ensure robustness, the analysis incorporates parallel trend assessments, placebo tests, and a range of stability checks. The findings disclose three principal conclusions: (1) ERP significantly enhances GTI in heavily polluting firms, particularly in state-owned enterprises (SOEs) and those located in eastern China, although the effect wanes over time. (2) Certification in environmental management systems (EMS) enhances the policy's efficacy, highlighting the significance of differences in environmental governance capabilities related to firm-specific competencies; (3) The study reveals that digital transformation markedly enhances the influence of ERP on GTI for the entire sample; however, this moderating effect in heavily polluting firms is only evident with a two-period lag and is insignificant at other intervals. This indicates a gradual and deferred integration of digitalization and green transformation, highlighting the necessity of timely policy support for high-pollution sectors. This study enhances the micro-level comprehension of the impact of regulation on innovation, underscores the moderating influence of a firm's endogenous capabilities, and provides empirical insights for refining policy formulation and green transition strategies in pollution-intensive industries.