Government environmental concerns and corporate green innovation: Evidence from heavy‐polluting enterprises in China

Abstract

The objective of this study is to examine the impact of government environmental concerns on green innovation and whether this has a “leverage effect” or a “crowding‐out effect.” This study employs a two‐way fixed‐effects model to conduct an empirical test using panel data from 2010 to 2020 on Chinese firms listed in heavy‐polluting industries. The results suggest that an increase in government environmental concerns can promote corporate green innovation. However, government environmental concerns primarily stimulate strategic innovation rather than substantive innovation. After a series of robustness and endogeneity tests, the conclusions of this paper still hold. Corporate green innovation induced by government environmental concerns is not the “leverage effect” superimposed on existing innovation activities but the “crowding‐out effect” of other technological innovation. The heterogeneity tests in this paper indicate that the impact is more pronounced for firms with poorer environmental conditions, stronger political connections, and richer executive backgrounds.

ESG rating divergence and corporate green innovation

“…Extending beyond the literature on the uncertainty and risk of ESG rating divergence (see e.g., Avramov et al, 2022; Christensen et al, 2022; Dumrose et al, 2022; Wang, Tian & Shangguan, 2023), we further investigate how this negativity of ESG rating divergence affects corporate green innovation. Consistent with the literature on how firms respond to external pressures, risks, and threats (see e.g., Chen, Zhu, et al, 2023; Comyns et al, 2023; Patten, 1992; Wang, Song & Wang, 2023; Zhang et al, 2020; Zhou & Wang, 2020), our study provides empirical evidence that firms tend to offset the threat to their legitimacy and green reputation from ESG rating divergence by releasing reliable green signals through green innovation.…”

“…In addition, the consequences of green innovation are also of great concern in academia (see e.g., Chen et al, 2023; Hao, Chen, et al, 2022; Ho et al, 2023; Huang & Li, 2017; Lin et al, 2020; Xie et al, 2019). We provide empirical evidence that firms can leverage green innovation as a response to ESG rating divergence, which supports the role of green innovation in stakeholder management (Chen, Zhu, et al, 2023; Wang, Song & Wang, 2023; Zhang et al, 2020). On this basis, we show that green innovation can serve as a buffer against risks related to ESG rating divergence, which enriches the study on the benefits of green innovation (Zaman et al, 2021).…”

“…By actively engaging in green innovation, firms can send strategic signals to the stakeholders that their business activities are in line with ESG principles. This green innovation as a response can satisfy stakeholder demands (Chen, Zhu, et al, 2023; Yang et al, 2023), thus helping firms cope with ESG rating divergence. For one thing, according to the insurance‐like theory (Godfrey et al, 2009; Shiu & Yang, 2017), firms can adopt green innovation strategies to offset the negative impact of ESG rating divergence on their legitimacy, green reputation, and thus risks.…”

“…Green innovation is a substantive green behavior characterized by high inputs and long cycles (Xiang et al, 2022). Therefore, the signal released by firms through green innovation has a high degree of credibility, which can enhance stakeholders' confidence in their green and sustainable development (Chen, Zhu, et al, 2023). As a result, firms can gain green reputation from stakeholders through their positive green innovation behaviors (Chen et al, 2023).…”

“…In particular, we know little about how ESG rating divergence affects corporate sustainability. It has been suggested that green innovation, as an important way to achieve sustainable development, is one of the responsive tools for firms to deal with stakeholder pressures (Chen, Zhu, et al, 2023; Wang, Song & Wang, 2023; Zhang et al, 2020). If so, can firms respond to ESG rating divergence through green innovation?…”