Heterogeneous effects of bottom-up responsiveness and top-down central environmental inspection on corporate green innovation across ownership and competition

This paper examines how bottom-up municipal responsiveness and top-down central environmental inspection pressure shape firms' green innovation behavior in China. Using a firm-level panel of all non-financial A-listed firms, patent data from the China Research Data Services Platform, a city-level government responsiveness index, and the first round of Central Environmental Protection Inspections, we study how different environmental governance pressures are associated with green innovation in firms’ overall innovation portfolios. To address endogeneity in municipal responsiveness, we use an instrumental-variable strategy based on lagged leave-one-out responsiveness of other cities within the same province. To examine central inspection pressure, we combine province-cohort exposure regressions with double/debiased machine learning, recognizing that all provinces were eventually inspected and that the design therefore lacks a conventional never-treated control group. The results are consistent with a dual-channel pattern. Municipal responsiveness is positively associated with firms' green innovation share mainly in the contemporaneous specification and among non-SOEs (state-owned enterprises), consistent with a bottom-up local governance-signaling mechanism. By contrast, central inspection exposure is associated with a stronger green innovation response among SOEs, consistent with a top-down political accountability mechanism. For non-SOEs, market competition weakens the conversion of central inspection exposure into green innovation. These findings suggest that environmental governance does not affect firms’ innovation behavior uniformly: its association with green innovation depends on the level of government from which pressure originates, the ownership structure of the firm, and the competitive environment in which the firm operates.