Energy transition policy and green innovation in manufacturing firms: the dual forces of incentives and constraints

We evaluate how China’s New Energy Demonstration City Pilot Policy (NEDCPP) affects corporate green technological innovation. Using a difference-in-differences design, we find that the NEDCPP increases both the quantity and quality of firm-level green patent applications. The effect is more pronounced among firms in the eastern and central regions, large and medium-sized firms, firms in technology- and capital-intensive industries and firms in low-technology industries, firms facing low competition, and those with medium-to-high environmental performance (supporting the ‘weak’ Porter hypothesis). Mechanism analyses, using firm-level energy data, indicate that alleviating financing constraints and reducing energy consumption intensity serve as two primary transmission channels. Our findings withstand a battery of robustness checks, including parallel trend and placebo tests, alternative measures of green innovation, alternative identification strategies, different matching and reweighting methods, additional controls for contemporaneous policies and city-level characteristics, and alternative fixed-effects and inference specifications. Overall, this study provides compelling firm-level evidence for the efficacy of place-based environmental regulation and offers nuanced insights for designing targeted, heterogeneous policies to leverage localized experiments for a sustainable transition.