Environmental regulation, green innovation, and productivity: Crowding-out or reallocation?

This is the authors' abstract. We don't add key points for this paper.

Does environmental regulation enhance firm productivity through reallocation toward green innovation, conditional on firms' pollution intensity and productivity levels? We analyze Chinese listed firms (2010–2018) using a Crépon–Duguet–Mairesse recursive framework, a three-equation causal chain that links regulation, innovation, and productivity. We find that a variety of environmental policies raise compliance costs, crowding-out average R&D investment. Non-green innovation yields higher productivity returns in low-pollution firms and exhibits a U-shaped return pattern across the productivity distribution, whereas green innovation's returns follow an inverted-U-shaped profile, peaking at medium-high productivity—where, for high-pollution firms, they exceed those of non-green innovation, boosting TFP. These results provide mechanism-based evidence for the strong Porter hypothesis as a context-dependent reconfiguration of technological and productive efficiency under regulatory stimuli. Policy support for green innovation should be targeted at high-pollution, mid-to-high-productivity firms based on verifiable outcomes, turning the crowding-out of R&D into productive reallocation.