Government's green grip: Does industrial policy improve firm environmental performance?

National industrial policy is a common means for the government to regulate economic activities, and its effect on the environmental performance of enterprises is controversial. Based on the encouraged industries in China's “Five‐Year Plan,” the impact and micro‐influence mechanism of industrial policies on SO2 emission of enterprises are systematically analyzed. The results indicate that industrial policy can significantly reduce the SO2 emission in encouraged industries, and the conclusion is still valid after a series of robustness tests. This emission reduction effect is greater for the state‐owned firm, high R&D intensity firm, and high‐pollution firm. Compared with the firms in general encouraged industry, industrial policy has a greater impact on the SO2 emissions of firms in the key encouraged industries. The industrial policy promotes the resources transfer from high‐polluting companies to low‐polluting companies, reducing the market share of high‐pollution firms. Additionally, it reduces pollution emissions through front‐end pollution control (clean energy substitution and technological innovation). The conclusions of this study provide theoretical support for appropriate government policy intervention and have important practical significance for China's green sustainable development.