Environmental protection investment and enterprise innovation: evidence from Chinese listed companies

China has emerged as the world's second-largest economy due to rapid industrial expansion and phenomenal economic growth of China in recent decades. Though, this exponential economic turnaround has been fueled by widespread energy consumption, making China among the largest pollutant emitters in the world. Chinese enterprises have come under greater scrutiny and the Government has mandated Chinese companies to undertake environmental protection investment. This study aims to explore the relationship between environmental protection investment and enterprise innovation by taking evidence from Chinese listed firms.

The data of 2,568 Chinese A-share listed firm-year observations were collected from the Shanghai and Shenzhen stock exchanges during 2008–2016. This study employed ordinary least square and panel data fixed effects techniques to ascertain the association between proposed variables.

The authors' findings conjecture the crowding-out effects of environmental investments on enterprise innovation-related expenditures. Furthermore, additional empirical testing reveals that Research and Development (R&D) undertakings of state-owned and politically connected enterprises are not affected by environmental investments. Likewise, corporate innovation activities are not negatively influenced by environmental investments in polluting industries. The study findings offer fresh insights to regulators, corporate managers and stakeholders. The authors' results are robust to alternate econometric specifications and alternate variable specifications.

This study makes the following contributions toward the extant literature. First, the study investigates if there is a crowding-out effect of spending on environmental protection in the current period and the innovation expenditure in the upcoming period. Empirical results confirm that there exists a trade-off between both types of spending, implying that the spending on environmental protection will negatively influence the spending on innovation. Second, the study deepens the analysis in considering other influences in this relationship. For instance, the authors' separately consider the aforementioned trade-off in state-owned enterprises and non-state-owned enterprises. The study also examines the mediating influence of corporate political connections and industry attributes, whether or not these influence the relationship between the actual spending on environmental protection and the upcoming spending on innovation.