The impact of environmental protection regulations on firms’ R&D investment: evidence from China

Abstract

China has experienced rapid economic growth and industrialization over the last 70 years, which has created significant opportunities for firms and improved the quality of life for many residents. However, this increased industrialization has also had a significant negative impact on the environment. To address this major challenge, the Ministry of Environmental Protection (MEP) of the People’s Republic of China has introduced several Environmental Protection Regulations (EPRs) into its regulatory framework during the last 2 decades in order to reduce the pollutant emissions generated by firms. Based on panel data from publicly listed firms in China’s manufacturing industry, spanning 2010 to 2020, this study aims to assess the impact of EPRs on firms’ pollutant emissions and resultant Research and Development (R&D) investment. In addition, the research examines the contributory role of R&D investment in the mitigation of pollutant emissions, providing important insights for governments and policy makers when seeking to refine environmental policies. In so doing, several noteworthy contributions are made to current literature: first, newly enacted EPRs are found to have markedly decreased both the aggregate and per-output pollutant emissions of firms. Second, there has been a significant upsurge in R&D investment prompted by the introduction of the new EPRs. Third, the study did not confirm a significant mediating role for firms’ R&D investments in reducing pollutant emissions; this conclusion was supported by robustness testing. Fourth, the EPRs were found to notably reduce pollutant emissions for state-owned firms and those in economically advanced regions. However, for firms in less developed regions and those not state-owned, EPRs could potentially reduce their revenues.