1. Introduction
Over the past 40 years of reform and opening-up, China has gradually completed the transition from a planned economy to a market economy, which has an increasing impact on firm behavior. As one of the important components of the Chinese economy, private firms have experienced a leapfrog development process of growing from weak to strong, which plays an increasingly critical role in the improvement of Chinese firms’ innovation. According to the latest China Statistical Yearbook on Science and Technology (2018), the proportion of patent applications of private firms has reached 77.8% in China, which is 12 times that of state-owned firms (6.5%). Private firms have become the main force of innovation in China. Nevertheless, state-owned firms hold the lifeline of the national economy, and they occupy more national resources and capital than private ones in China. For the acquisition of important resources such as land and capital, state-owned firms often obtain them at a lower cost. Furthermore, state-owned firms have political advantages that private firms do not. They often have a monopoly advantage on important resources and key fields with the support of the government; therefore, they have huge advantages of scale. In contrast, private firms are at a relatively disadvantaged position in the market economy. Therefore, private firms have less ability to bear losses due to policy changes. It means that in the development of the government-dominated economy in China, private firms are more concerned about the impact of changes in government policies, such as minor changes in environmental regulation. Therefore, it is necessary to focus on the impact of environmental regulation on Chinese publicly listed private firms.
Among the existing literature, the impact of environmental regulation on firm innovation has always been one of the focuses. The weak Porter hypothesis argues that reasonable environmental regulation will guide firms to improve production strategies and stimulate firm innovation (Porter and Vanderlinde, 1995) [
1]. Nevertheless, there is controversy in academia about the weak Porter hypothesis. Although extensive research on the European Union Emissions Trading Scheme (EU ETS) initially found that environmental regulation promoted firm innovation (Calel and Dechezlepretre, 2016) [
2], more research believes that environmental regulation has a crowding-out effect on firm investment and inhibits firm innovation (Kneller and Manderson, 2012; Ramanathan et al., 2010) [
3,
4]. Subsequent research suggests that environmental regulation may have a nonlinear effect on firm innovation, which is presented as U-shaped (Ouyang et al., 2020; Pan et al., 2019) [
5,
6] or inverted U-shape (Wang and Shen, 2016) [
7]. Especially under the influence of different mechanisms of administrative environmental regulation and market-based environmental regulation, different types of environmental regulation tools will have diverse impacts on firm innovation (Ambec et al., 2013; Jung et al., 1996; Stranlund, 1997) [
8,
9,
10].
China’s government began to learn from the European Union and introduced a cap and trade system to reduce pollution in 2010, which is a market-based environmental regulation. In 2011, the National Development and Reform Commission in China released the Notice on Carrying Out the Pilot Project on Carbon Emissions Trading, approving seven carbon emissions and trading pilots to be established, which includes Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, and Shenzhen. These seven pilots officially launched the carbon emissions and trading market from 2013 to 2014. The carbon market has begun to become an important factor affecting the revenue, cost, and various economic activities of the regulated firms included in the carbon emission quota’s management list of China. In 2017, China further proposed to start a national carbon market. Therefore, did CCETP have a promoting effect on China’s firm innovation, as expected by the weak Porter hypothesis? This question requires further empirical tests. Some scholars have tried to study the impact of the carbon market on firm innovation using invention patents, green patents, and so on (Feng et al., 2017; Zhang et al., 2019) [
11,
12]. However, their conclusions are quite different. This inconsistency may be explained by the fact that patents mainly measure firm innovation output; however, it cannot truly measure the direct impact of the carbon market on firm innovation due to the relative low innovation capacity and R&D efficiency of China’s firms, which lead to great uncertainty in the transition of innovation input into innovation output. Liu et al. (2020) [
13] found that the R&D expenditure of industrial firms in China’s 31 provinces, autonomous regions, and municipalities directly under the central government has increased year by year, but the growth rate of R&D output was much lower than the growth rate of R&D investment. Chiu et al. (2012) [
14] found that the R&D efficiency of the electronics and computer industries in China’s high-tech industries was low, mainly because some patents cannot effectively create value. Zhang et al. (2019) [
15] found that the output efficiency of new products in 31 provinces, autonomous regions, and municipalities directly under the central government in Chinese mainland was not ideal. On the contrary, R&D investment can at least reflect the direct response of firms in innovation to the changes in environmental regulation. Accordingly, this paper emphasizes that, in China, variables that measure the innovation input of firms can more accurately reflect the direct effects of CCETP on firm innovation. Nevertheless, whether CCETP will exhibit distinctive effects on the innovation input (R&D investment) and the innovation output (patents) of firms should be further examined.
Existing literature mainly employs a full sample that includes all kinds of firms in China to analyze the impact of environmental regulation on firm innovation (Ouyang et al., 2020; Feng et al., 2017; Zhang et al., 2019) [
5,
11,
12]. Most of them ignore the particularity of private firms. The difference in obtaining critical market resources and participating in market competition may affect firm innovation, especially during the transition of China from a planned economy to a market economy. For example, state-owned firms in China have innate ties with the government. Their executives generally have close contacts with the government, and they are more resistant to the risks of policy changes. In contrast, private firms without political connection are often in a weak position when acquiring critical resources and participating in market competition. However, the political connection of executives can help private firms establish the acquired associations with the government, which makes political associations have a more significant impact of environmental regulation on a firm’s innovation. We are thus motivated to focus on the impact of CCETP on the innovation of publicly listed private firms in China.
Moreover, existing studies have been conducted on the measurement and impact of political connection on the outcomes of environmental regulation. Zhan and Tang (2016) [
16] divided the political connection into political relations, organizational relations, and personal relations. Among them, political connection means some of the firm’s executives are or have served in government departments or legislatures. However, more studies have measured the level of political connection using indicators such as the proportion of general directors with political backgrounds and whether chairmen or general managers have political experience (Fan et al., 2007; Liu et al., 2017) [
17,
18]. Some studies have also shown that political connection probably have different impacts on the effect of environmental regulation. On the one hand, a political connection may have a refuge effect on firms’ violation of environmental regulation because of the collusion between the government and the firms, which reduces the actual effect of environmental regulation (De Villiers et al., 2011) [
19]. On the other hand, firms with political connection will perform environmental protection responsibilities as requirements of the government to attain favorable regulatory conditions (Agrawal and Knoeber, 2001) [
20], alleviate financing constraints (Claessens et al., 2008; Li et al., 2008) [
21,
22], get government assistance (Faccio and Masulis, 2006) [
23], and avoid negative impacts on firm stock returns and firm performance (Chang and Wong, 2004) [
24], which may lead to environmental regulation playing an effective role. Then, will the differences in political connection have a moderating effect on the impact of CCETP on the innovation of publicly listed private firms? This question needs to be tested.
Our research’s main importance is to find the effect of market-based environmental regulation, which is CCETP, on the firms’ R&D investment and the moderating impact of the firms’ political connection. There are two contributions in this paper. First, this paper enriches the studies that discuss the short-term policy effect of CCETP from the perspective of publicly listed private firms’ R&D investment. Second, existing literature rarely explores the role of the political connection of the firms’ executives on the impact of CCETP on economic activities. This paper makes further examination of whether the differences in political connection have moderating effects on the impact of CCETP on publicly listed private firms’ innovation input or not.
The remainder of this paper is as follows.
Section 2 provides the background of CCETP, mechanism analysis of its influence on firm innovation, and research hypotheses.
Section 3 describes the methodology, variables, and model.
Section 4 presents the baseline results and robustness checks.
Section 5 outlines further analysis.
Section 6 presents the conclusions and policy implications.
3. Research Design and Main Model
3.1. Selection of Samples
In China’s economic system, the public sector of the economy dominates the whole economy to some degree. Therefore, firms are often classified according to the nature of their ownership. Chinese firms can generally be divided into state-owned firms, nonstate-owned firms, and foreign-funded firms, while nonstate-owned firms can all be called private firms. The private firms in this paper are also classified according to the nature of firm ownership. In China’s A-share market, publicly listed firms can be divided into publicly listed state-owned firms and publicly listed private firms. This paper only studies the effect of CCETP on publicly listed private firms. This paper takes publicly listed private firms listed on the Shanghai and Shenzhen A-share markets in China from 2010 to 2014 as research samples. Firstly, there are three reasons for setting the window period to 2010–2014. (1) The window period selected can identify policy effects better and exclude the noise interference that may exist for a long period. (2) The data of R&D investment before 2010 are missing too much information. (3) The window period can evaluate the direct policy effect of CCETP on firms’ innovation input. Secondly, we deal with data in the following steps, excluding (1) listed firms after 2010, (2) sample firms of ST on the A-share market. (3) firms of the financial industry, and (4) firms with missing data. Then, 2974 observations were obtained. Then, we selected the regulated firms that were first included in the quota management list in the 7 pilots as the treatment group, and deleted the samples that were removed from the list in the following years, as well as the samples whose registration place and actual management place were not the same. Finally, due to the lack of firm R&D input data, we ended up with 23 regulated publicly listed private firms, with 105 effective observations that were nonbalanced panel data. In order to eliminate the influence of outliers, this paper makes a tailing treatment for all variables at 1% and 99% quantiles.
The data sources of this paper are as follows. Firm R&D investment intensity, executive political background, and other firm-level characteristic variable data, as well as data of the provincial level are from the CSMAR database. The CSMAR(China Stock Market&Accounting Research Database) database is a research accurate database in the economic and financial field which is developed based on China’s actual national conditions. Regulated firms were sorted out of the website of the Development and Reform Commissions of the seven pilots.
3.2. Variables Explanation
In this paper, the impact of CCETP on innovation input will be checked. The main variables are as follows.
The dependent variable is the intensity of R&D investment (RD). This paper mainly uses the intensity of R&D investment as a proxy variable for the innovation input of China’s publicly listed private firms.
The independent variable is the interactive item TREAT × POST, whose coefficient reflects the change in R&D investment between regulated and nonregulated firms before and after CCETP, where TREAT indicates whether the firm is a regulated firm included in the carbon emission quota management list, and POST indicates before or after the establishment year of CCETP. Since the establishment of CCETP was mainly in 2013, this paper takes 2013 as the year in which policy shocks occurred; the years before 2013 are the prepilot period, the years after 2013 are the postpilot period.
Existing literature has studied the influencing factors of firm innovation input (Gao et al., 2019; Chang et al., 2015; Ferris et al., 2016) [
30,
32,
33]. According to them, we determined the control variables and moderating variables in this paper. The main explanations of them are in
Table 1.
3.3. Empirical Model
In order to test H1, we construct the following Model (1). In Model (1), we used the difference-in-differences (DID) method, which is mainly aimed at verifying whether CCETP can promote publicly listed private firms to increase innovation input or not. In order to distinguish between the treatment group and the control group, and to identify whether the R&D investment of different firms is affected by the policy intervention before and after policy implementation, two dummy variables were needed to divide the samples into different groups. Therefore, the DID model in this paper needs relatively more dummy variables.
where
is the dependent variable, which measures the firm’s investment in innovation;
is the independent variable, whose coefficient is the policy effect that this paper focuses on;
is a dummy variable that denotes whether the firm is included in the carbon emission pilot list,
is 1 if the firm
i is a regulated firm, otherwise 0. The variable
indicates whether the time is after 2013 or not; the value is 0 if before 2013, otherwise 1.
is a control variable changing over time at the firm level.
is the industry fixed effect, which is used to control industry-level unobservable factors that affect firms’ R&D investment but do not change over time.
is the year’s fixed effect, which is used to control the impact of time-varying factors at the macro level.
is the firms’ fixed effect, which is used to control firm-level unobservable factors that affect the firms’ R&D investment but do not change over time.
is an error term. To reduce the possible impact of heteroscedasticity and intragroup correlation, this paper uses standard robust errors at the province level.
When existing research constructs political connection indicators, most of the dummy variables are constructed according to whether the chairman or general manager of the firm has a political background. For example, whether the chairman or general manager of the firm works in a government agency or whether he or she is an industry supervisor or representative of the people’s congress (Fan et al., 2007; Gao et al., 2019; Ferris et al., 2016) [
17,
30,
33]. Besides, indicators of political connection are generally one-dimensional. Information about personal and organizational relations and personal relations related to privacy is difficult to obtain publicly. Therefore, this paper draws on mainstream practices to construct the dummy variable. In order to test whether the political connection has a moderating effect on the impact of CCETP on publicly listed private firms’ innovation input, we set up Model (2):
where
is a dummy variable that measures the difference between political connection; if the chairman or general manager of the firm has a political background, the value is 1, otherwise 0.
6. Conclusions and Policy Implications
Using the sample of regulated publicly listed private firms in China from 2010 to 2014, we took China’s carbon emissions and trading pilot (CCETP) as a quasi-natural experiment to examine the policy impact of CCETP on the innovation input of publicly listed private firms and the moderating effect of the firms’ political connection on the relationship between them, based on a difference-in-differences model. Conclusions and implications are as follows.
First, CCETP has effectively promoted the innovation input of Chinese publicly listed private firms. The results of this paper fully verify that market-based environmental regulation can significantly induce publicly listed private firms to increase R&D investment and achieve a win–win between environmental protection and innovative development. The weak Porter hypothesis has, again, been verified in this paper. In order to reduce the negative impact of CCETP on publicly listed private firms’ R&D investment, the Chinese government should strengthen cooperation with publicly listed private firms in the construction of China’s carbon market and provide more convenience and policy guidance to them to give full play to the role of the national carbon market. Moreover, this article verifies that CCETP has promoted the win–win development of Chinese publicly listed private firms and the environment. Therefore, the Chinese government should continue to intensify the construction of the carbon market, improve the quota and trading system, and improve guidance policies. Only by these strategies can the carbon market have a better role in stimulating the innovation of firms and reducing carbon emissions.
Second, there are differences in the impact of CCETP on the innovation input and output of publicly listed private firms. It shows that CCETP can effectively increase the innovation input of publicly listed private firms; however, the impact on the output of firms’ innovation is not obvious due to the low efficiency of R&D output in China. The government needs to build more public service platforms to improve the efficiency and transformation of R&D and formulate effective strategies to accelerate the actual conversion of R&D investment to innovation output. This article further confirms the low R&D efficiency of Chinese publicly listed private firms at present, which is consistent with existing research (Liu et al., 2020; Zhang et al., 2019) [
13,
15], indicating that it is a long process for Chinese firms to shift from attaching importance to increasing R&D investment to innovation output. How to transform human, capital, and resource input into innovation output is an urgent problem for firms to solve. At present, China is experiencing an economic transformation, so it requires more technological innovation to promote the transformation. During this process, the government needs to provide public services, as well as to promote the technological innovation of the firms.
Third, the political connection of a firm’s executives has a positive moderating effect on the impact of CCETP on innovation input. The carbon market has a stronger innovation promotion effect on publicly listed private firms with stronger political connection. At the same time, the political connection is more likely to generate positive incentives for the carbon market to promote firm innovation input in regions with high environmental protection investment and large firms. The government should pay more attention to the institutional design and business environment of the carbon market to reduce the burden on firms with less political connection. Moreover, convenient financing and innovation subsidies should be provided to small- and medium-sized publicly listed private firms to stimulate the innovation vitality of the firms. For publicly listed private firms, they can take advantage of their political connection, without breaking the law, to enhance their competitiveness in the market.
In this paper, there are still some limitations in our study that can be improved in further discussion. First, in our paper, we mainly focused on the impact of CCETP on the innovation input of all publicly listed private firms in the seven carbon pilots. In fact, we did not consider the specific circumstances of each carbon pilot to some extent because of limited data on the regulated publicly listed private firms by CCETP. In the robustness test, we only excluded the Chongqing and Tianjin pilots and did not further differentiate and quantify the activity of the remaining five pilots. Therefore, we cannot distinguish the impact of CCETP on firm innovation input in each pilot, which can be improved in the future. Second, this paper has deficiencies in the construction of key variable indicators. Specifically, we did not use the dimensions of political connection but a dummy variable. This can be carried out from other perspectives in future research.