Energy price and cost induced innovation: Evidence from China

This study investigates the effect of energy price on firm’s innovation in China. Energy is important input factor in manufacturing firms and significantly affecting firm’s operation cost, but we scarcely know its effects on firm innovation. While the increase of energy price may reduce R&D investment and innovation by undermining firm profits, the high input cost may call for active responses of firms to energy-saving efforts, which will eventually enhance firm innovation. We present the following evidence on the basis of listed firms in China’s manufacturing industry: 1) Energy price significantly raises firm’s innovation as measured by patents at the firm level, which support the induced innovation hypothesis. 2) Path analysis indicates that the underlying channel is operation cost and manager’s career concern. Specifically, rising energy price increases operating costs and the prospects of manager’s career concern, which, in turn, encourage firms to innovate. 3) Our findings are particularly pronounced in firms where the rising energy shock may bring more cost pressures, and firms where CEOs have more career concerns. Overall, this study provides timely evidence and important policy implications for the ongoing debates on energy saving worldwide.