Ecological Engineering and Green Transition: Spillover Effects of the South-North Water Transfer Project on Innovation and Sustainable Development in China

Environmental policy interventions, particularly large-scale ecological engineering projects, play an important role in shaping regional sustainability transitions. China’s South-North Water Transfer (SNWT) Project, the world’s largest inter-basin water diversion initiative, addresses spatial imbalances in water resource distribution while entailing stringent environmental regulatory requirements. This study examines the project’s spillover effects on green innovation, a critical driver of sustainable development, by treating the SNWT as a quasi-natural experiment. Empirical findings revealed that cities along the project route experienced significant increases in innovation activity post-implementation: general invention patent applications rose by 24.2% and green invention patents rose by 28.2%. Further investigation revealed that the project did not trigger substantial industrial relocation, nor did it lead to notable contractions in industrial output or investment scales. However, industrial enterprises in these cities exhibited an approximate 7% decline in labor demand. This decline was accompanied by reductions in pollution emissions and improvements in green productivity, pointing to a possible labor-technology substitution effect driven by innovation advances. These findings highlighted that well-designed environmental policies could stimulate green technological innovation, while also revealing potential trade-offs, such as a crowding-out effect on labor. Our investigation offered insights for evaluating large-scale ecological engineering projects as tools for sustainable development governance.