Supply chain innovation and energy efficiency retrofits in China: Empirical evidence from listed companies (2000–2023)

Abstract

The persistent misalignment between energy efficiency mandates and radical innovation capacity in vertically integrated manufacturing supply chains represents a critical yet empirically underexplored challenge for large emerging economies committed to simultaneous industrial upgrading and deep decarbonization, particularly in China where the dual-carbon targets — carbon peaking by 2030 and carbon neutrality by 2060 — place unprecedented and often competing demands on firm-level resource allocation across production networks. This study investigates whether downstream customers' energy efficiency retrofit investments stimulate radical innovation among upstream suppliers within Chinese listed company supply chains, whether suppliers' own retrofit expenditure generates a resource-based crowding-out of their radical innovation capacity, and how supplier and customer market power asymmetries moderate both mechanisms across a panel of 4827 firm-year observations drawn from all A-share listed Chinese manufacturing companies over the period 2000–2023, with patent citation records sourced from the China National Intellectual Property Administration (CNIPA) and firm-level financial data from the China National Research Data Service (CNRDS). A two-way fixed-effects model augmented with Arellano-Bond Generalized Method of Moments (GMM) estimation and a provincial carbon abatement target instrumental variable strategy is applied to produce endogeneity-corrected causal estimates. Four principal results emerge: downstream customers' energy efficiency retrofit expenditure exerts a significant positive demand-pull effect on upstream radical innovation, with a fixed-effects coefficient of 0.0054 (p < 0.01) amplifying to 0.2248 (p < 0.01) under IV-2SLS estimation; suppliers' own retrofit investment generates a significant crowding-out of radical innovation capacity, with a coefficient of −0.0033 (p < 0.05), consistent with capital-energy substitution whereby compliance expenditure competes directly with exploratory R&D; the demand-pull effect is amplified when suppliers hold high market power (interaction coefficient: 0.0127, p < 0.05) and significantly suppressed when dominant customer relationships constrain supplier pricing autonomy (interaction coefficient: −0.0391, p < 0.01); and the innovation spillover from downstream retrofitting operates exclusively through radical channels, leaving incremental innovation statistically unaffected, confirming that environmental compliance pressure functions as a categorical demand signal for fundamental rather than marginal technological solutions. These findings imply that policymakers should adopt supply-chain-aware innovation support instruments — including differentiated green finance facilities, collaborative R&D tax credits, and power-structure-sensitive subsidy architectures — to simultaneously advance decarbonization and preserve the radical innovation capacity underpinning China's long-run technological competitiveness.