Environmental Enforcement and Green Innovation: Answering the Call for Sustainability

ABSTRACT

Past scholarship on institutional theory has increasingly recognized the effect of institutional agents (e.g., regulators) and their potential impacts on environmental behaviors. However, limited attention has been paid to how firms respond to the government's environmental enforcement by engaging in green innovation. The current study extends institutional theory by investigating how environmental enforcement affects firms' green behaviors, an important phenomenon that has been overlooked by most previous studies. Airborne officials— officials with experience in the central government who are appointed to local government positions —also play a significant role. The results from Poisson regression analysis of Chinese listed firms show that firms operating in regions with higher environmental enforcement engage more actively in green innovation. This empirical finding was reinforced by showing that green innovation subsidies and firms' environmental, social, and governance (ESG) engagement serve as mechanisms through which regulatory enforcement cultivates an environment that encourages firms to participate more actively in green innovation activities. The findings also indicate that these firms respond more proactively when the officials are airborne. However, they engage less actively in green innovation when these officials have a longer tenure or they hold hometown ties. These findings contribute to institutional theory by exploring how national institutional arrangements affect firms' green innovation.