The Real Effects of Environmental Policy: Competition and Green Innovation

Abstract

This study examines whether and how competition affects corporate strategic responses to stringent environmental policies. Using the nonattainment status of U.S. counties as a source of exogenous variation in environmental regulation, we find that competition fosters green innovation as firms respond to stricter regulatory policy. Results indicate that firms have stronger incentives to innovate in green technology when they belong to pollution-intensive industries, are inherently innovative firms, and face a higher cost of relocation. Regulation-induced green innovation helps competitive firms achieve greater product differentiation, stronger ESG reputation, and better customer attraction relative to less innovative firms. Finally, stricter environmental controls lead to improved market share growth, firm profitability, and valuation over a longer term for firms with more green inventions.