Opening up to a greener future: how China’s Free Trade Zones promote green innovation

Openness reforms are widely used to improve market access and attract investment, but their environmental consequences remain contested. Although previous research has separately examined trade liberalization and green innovation, less is known about whether institutional reforms intended to promote openness influence firms’ green innovation. China’s Free Trade Zones (FTZs), which combine trade and investment liberalization with regulatory reform, offer a valuable setting for examining this question. Exploiting the staggered establishment of FTZs and applying a staggered difference-in-differences design to A-share listed firms, we find that FTZ establishment increases firms’ green invention patent applications by approximately 16%. The result is robust across alternative specifications and a series of robustness checks. Mechanism analyses reveal three transmission channels: FDI-induced technology spillovers, enhanced environmental governance, and increased R&D investments. Our findings extend the Porter Hypothesis to the context of institutional openness and demonstrate that trade and investment liberalization can complement traditional environmental regulation in fostering green innovation. The results suggest that policymakers should integrate openness reforms into the green transition toolkit while embedding explicit sustainability objectives into special economic zone design.