Environmental protection investment and corporate innovation: evidence from Chinese private firms

Purpose – This paper aims to investigate the impact of environmental protection investment (EPI) on corporate innovation within private enterprises in China – an area that has received limited attention. This study also aims to identify the potential economic mechanisms driving this relationship. Design/methodology/approach – This study uses a two-stage least squares approach with instrumental variables and a Heckman two-stage sample selection model to address concerns related to endogeneity. Findings – This paper finds a positive and significant association between EPI and investment in corporate innovation. Two potential mechanisms explaining this relationship are identified: enhanced access to financing opportunities and favorable tax treatment, both of which enable firms to allocate more resources to innovative activities. In addition, the positive impact of EPI is more pronounced in firms with embedded Chinese Communist Party units and those located in more marketized regions. Research limitations/implications – This paper relies on a single year of data, restricting its ability to control firm fixed effects and preventing it from conducting more robust analysis. Future research should use panel data to control firm fixed effects and examine more recent data, when such data becomes available, to enhance the robustness and relevance of the analysis. Originality/value – Previous research has examined the environmental dimension of corporate social responsibility and its impact on firm performance and behavior. However, these studies often overlook the unique context of unlisted private enterprises. This paper makes significant contributions by providing empirical evidence on the value of EPI for unlisted private firms in China, addressing a notable gap in the literature.