Environmental Monitoring Automation and Induced Innovation: Evidence from China

Abstract

The Porter Hypothesis predicted stringent environmental regulation could induce firms investing in innovation activities. However, we know little about the role of information in the regulatory implementation. This study examines the introduction of automated continuous environmental monitoring for large-scale polluting firms in China, specifically for validating information from existing non-automated discontinuous monitoring by local officials. We assess the reform’s impact on firms’ R&D investment using panel data of all publicly traded firms in China between 2010 and 2017, with the triple-difference method. Our analysis reveals that, the reform of environmental monitoring automation in China raised the compliance cost of the monitored firms with local political connections via removing their information advantage from the connections, and thus significantly induced their R&D investment. This study contributes to the literature of induced innovation and Porter hypothesis by detangling the effect of monitoring in addressing regulatory capture and strengthening environmental regulation.