Harnessing incentives for sustainability: The impact of eco−compensation reform on green innovation in China

Abstract

Against the backdrop of mounting global pressure for ecological governance, how to effectively stimulate corporate green innovation through institutional incentives has become a common challenge faced by nations worldwide. This study investigates the effect of the Ecological Compensation Reward–Punishment Mechanism Reform on corporate green innovation by utilizing a difference−in−differences approach and a panel dataset of A−share listed firms in China spanning 2003–2023. The empirical evidence indicates that the reform plays a significant role in fostering firms’ green innovation activities. Multiple robustness tests, including placebo simulations and PSM−DID estimations, further validate the consistency and reliability of the results. Mechanism analysis indicates that the reform exerts its effect indirectly by enhancing managerial environmental awareness and promoting corporate green transformation. Heterogeneity analysis reveals that firms in non−high−tech sectors, non−polluting industries, and competitive markets are more responsive to the policy, suggesting that institutional−dependent firms have a stronger sensitivity to external green incentives. Moreover, the effect is more pronounced among firms located in central and western China compared to those in the eastern region, indicating that in less−developed, policy−driven areas, the marginal effect of institutional incentives is more substantial. This study contributes micro−level evidence on the impact of ecological compensation policies on corporate green behavior and uncovers the organizational behavior logic of environmental policy mechanisms, providing actionable insights for developing economies and global ecological governance frameworks.