Does digital regulation reorient firm green innovation strategies? Evidence from China’s environmental monitoring reform

Environmental pollution persists globally due to information asymmetry and limited observability that weaken traditional regulation. Digital regulation (DR), using remote sensing and data analytics, improves real-time monitoring and transparency. Exploiting China’s 2019 Ecological Remote Sensing Monitoring Pilot in a difference-in-differences design, we find that DR increases firms’ green patent applications by 11.9%. DR promotes green innovation through two mechanisms: a constraint channel that strengthens compliance incentives via enhanced enforcement credibility, and a support channel that reduces innovation uncertainty through government-enabled digital infrastructure. DR also reorients firms from reactive, end-of-pipe compliance towards proactive pollution prevention and fosters green-digital technology integration. The positive effects are stronger for firms with weaker digital capabilities and those in highly competitive markets. These findings highlight DR as both an effective enforcement tool and an enabling framework for sustainable innovation.