Firm Innovation in Hazy Days: Chinese Evidence

Liyang Wan (), Yunxiao Liu (), Kangjuan Lv () and Ning Zhang
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Liyang Wan: Zhejiang University
Yunxiao Liu: Shanghai University
Kangjuan Lv: Shanghai University

Environmental & Resource Economics, 2024, vol. 87, issue 7, No 9, 1923-1954

Abstract: 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.

Keywords: Firm Innovation; Air Pollution; Human Capital; China (search for similar items in EconPapers)
JEL-codes: G32 O30 Q51 Q53 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10640-024-00878-7

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