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Firm Innovation in Hazy Days: Chinese Evidence

Author

Listed:
  • Liyang Wan

    (Zhejiang University)

  • Yunxiao Liu

    (Shanghai University)

  • Kangjuan Lv

    (Shanghai University)

  • Ning Zhang

    (Shandong University
    University of Cambridge)

Abstract

This paper estimates the causal effect of air pollution on firm innovation based on a nationwide sample of Chinese manufacturing firms. Using thermal inversion as instrument variable (IV), we demonstrate that air pollution significantly hurts firm innovation performance: a 1% increase in air pollution (PM2.5) in the past year, from its mean value, amounts to a 1.5% decrease in the number of invention patents compared to the average between 1999 and 2013. We also provide the casual estimate using regression discontinuity design (RDD) by exploiting the exogenous variation in pollution level caused by China’s Huai River policy: the decrease in firms’ invention patents is approximately 2.2% in the regions north of the Huai River Line. The underlying mechanism analyses reveal that poor air quality has detrimental effects on labor productivity, firms’ human capital accumulation, and financing ability. These findings highlight the substantial costs associated with air pollution, which are greater than previously thought, as it hinders innovation, a crucial driver of long-term economic growth.

Suggested Citation

  • Liyang Wan & Yunxiao Liu & Kangjuan Lv & Ning Zhang, 2024. "Firm Innovation in Hazy Days: Chinese Evidence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(7), pages 1923-1954, July.
    • Handle: RePEc:kap:enreec:v:87:y:2024:i:7:d:10.1007_s10640-024-00878-7
    DOI: 10.1007/s10640-024-00878-7
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    More about this item

    Keywords

    Firm Innovation; Air Pollution; Human Capital; China;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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