The Impact of Environmental Subsidies and Enforcement on Green Innovation: Evidence from Heavy-Polluting Enterprises in China

Zhe Xu, Ying Wang, Xiaoliang Shi, Yingying Qiu, Chunzi Su and Dan He ()
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Zhe Xu: The College of Economics and Management, Shenyang Agricultural University, Shenyang 110866, China
Ying Wang: The College of Economics and Management, Shenyang Agricultural University, Shenyang 110866, China
Xiaoliang Shi: The College of Economics and Management, Shenyang Agricultural University, Shenyang 110866, China
Yingying Qiu: The College of Economics and Management, Shenyang Agricultural University, Shenyang 110866, China
Chunzi Su: The College of Economics and Management, Shenyang Agricultural University, Shenyang 110866, China
Dan He: The College of Economics and Management, Shenyang Agricultural University, Shenyang 110866, China

Sustainability, 2025, vol. 17, issue 3, 1-25

Abstract: This paper investigates the critical role of government policies in promoting green development through enterprise-level green innovation (GI). We specifically examine the impact of environmental subsidies (ES) on heavily polluting enterprises and analyze how government environmental enforcement (EE) moderates this relationship. Furthermore, we explore how these effects vary across different ES characteristics and allocation patterns. Using data from heavy-polluting enterprises listed on China’s A-share market from 2012 to 2021, our analysis reveals several key findings. First, ES has unexpectedly hindered GI in heavily polluting enterprises. This negative effect stems from both ES characteristics and allocation patterns. Specifically, advance subsidies, targeted subsidies, and pollution prevention subsidies prove ineffective. The adverse impact of ES on GI is particularly pronounced in state-owned enterprises, companies lacking environmental protection investments, and firms engaging in earnings management practices. However, our findings indicate that strong environmental enforcement (EE) can effectively mitigate these ES-related issues. Under strict EE, ES demonstrates a positive effect on GI and addresses problems associated with both ES design characteristics and allocation patterns. These results offer valuable insights for government policymakers, particularly in developing countries undergoing green transition, to design and implement more effective environmental policies.

Keywords: environmental subsidy; environmental enforcement; green innovation (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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