Green with competitors? The effect of green factory peers on green innovation

Using the implementation of China’s green factory policy as the institutional setting, which allows firms to apply for government certification as green factories (GF), we examine how firms that are not GF-certified (focal firms) respond to their GF-certified peers within the same industry in the context of green innovation. Consistent with the crowding-out effect explanation, we find that the green innovation of focal firms is negatively associated with the number of green-certified peers. Our results remain robust across alternative measures of patent quality and a series of additional robustness checks. Channel analyses indicate that reduced access to government subsidies and procurement orders, along with greater financial constraints and higher cost of debt, help explain these findings. Overall, green-certified firms leverage government support and their superior resources to crowd out focal firms. Our findings provide a novel perspective on how GF-certified firms influence the green innovation of industry competitors, thereby highlighting the unintended negative externalities of the green manufacturing policy.