Climate policy uncertainty and corporate innovation investment: Evidence from China

Abstract

This paper estimates how corporate innovation investment responds to climate policy uncertainty using panel data with 3197 listed firms from 2010 to 2022 in China. The findings show that climate policy uncertainty positively contributes to corporate innovation investment, and this result continues to hold after controlling for endogeneity and conducting a series of robustness tests. Furthermore, we find that stringent government environmental regulation serves as a potential mechanism, compelling firms to adopt cleaner production and increase their investment in innovation. Additionally, this positive relationship is stronger for firms with higher government subsidies and disappears for firms with a higher allocation of fixed assets. We also find that firms with fewer connections to the government are more sensitive to climate policy uncertainty and they tend to increase their investment in innovation to mitigate the uncertainty. Furthermore, when firms invest more in innovation during periods of high policy uncertainty, their long-term performance and firm value are likely to improve. This study sheds light on the importance and influence of climate policy uncertainty on corporate innovation investment in China.