School of Economics, Huazhong University of Science and Technology; Research Center for Contemporary Economics, Huazhong University of Science and Technology; School of Accounting, Government Accounting Research Institute, Zhongnan University of Economics and Law
Summary:
Ecological laws are essential for the green transformation of the economy and overall social development. Firms play a key role in economic development and ecological protection. We examine the effect of strengthening the ecological legal environment on the green technological innovation of microenterprises to better understand how enterprises cope with changes in the external judicial environment and how they can achieve high-quality development within the context of ecological laws. According to the classical view, environmental regulations increase firms' costs, crowding out other investments. Meanwhile, green technological innovation involves high risk, high investment, long time horizons, and patent conversion. Therefore, environmental regulations may hinder technological innovation. However, recent studies confirm that green technological innovation, as a long-term green transformation strategy, can help enterprises reduce their environmental costs, enhance their green competitiveness, and realize their transformation and upgrading. This ultimately results in a win-win in terms of economic efficiency and environmental protection. However, empirical evidence of how regional environmental justice reforms affect firms' green innovation is lacking. We examine this effect using the gradual establishment of regional environmental courts as a quasi-natural experiment. Since 2007, intermediate people's courts have been establishing environmental courts. Using the 2003-2019 data of A-share listed manufacturing companies in China and the difference-in-differences method, we examine the impact of this environmental justice reform on firms' green innovation. Our results show that the establishment of environmental courts significantly enhances firms' production of green patents. Moreover, mechanism tests suggest that the courts promote firms' green transition by increasing their risk of litigation and expected cost of environmental violations. This effect is stronger in areas with high judicial independence, strong legal governance, and high industrial pollution emissions and in areas where residents have a strong awareness of judicial protections. The environmental courts motivate firms to improve the efficiency of their innovation resources. Furthermore, firms that invest in environmental protection in the short term improve their green innovation in the long term. Our study's contributions are as follows. First, we find that the establishment of local environmental courts promotes corporate green innovation. This provides micro-level evidence supporting previous studies' finding that environmental courts mitigate urban pollution. It also reveals the specific mechanism by which local environmental courts promote environmental pollution control: firms improve their environmental governance through green innovation activities. Second, we test for differences in this effect using the establishment of environmental courts as a shock to the local legal environment. The results show that enforcing environmental law at the local level promotes firms' green innovation without crowding out other investments. Third, according to the Porter hypothesis, firms that invest in environmental protection increase their innovation and application of clean technologies, ultimately achieving a win-win situation for both environmental management and profitability. Consistent with the Porter hypothesis, our results show that firms that make short-term environmental investments are more likely to engage in green innovation activities in the future. This implies that short-term responses to changes in the judicial environment have a transitional effect. Short-term environmental investments promote the transition to a long-term development strategy, which is a practical reference for understanding the transition decisions of firms that face changes in their judicial environment. Finally, most studies of law and economics in China focus on how changes in the legal system affect economic performance. Our study enriches this body of literature by examining the establishment of regional environmental courts to strengthen environmental justice. The results demonstrate that such legal capacity building can promote economic development.
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