Local air pollution and corporate innovation

We examine how local air quality shapes firm innovation. Using a panel dataset of Chinese listed firms from 2014 to 2017, we find significant decreases in R&D expenditure and patents for firms located in cities with severe air pollution. Moreover, we find that firms tend to mitigate the adverse effects of air pollution by shifting innovation activities to their subsidiaries located in areas with better air quality. Cross-sectional analyses reveal that the decreases are more pronounced for non-SOEs, financially constrained firms and firms in high-tech industries. We provide causal evidence using the instrumental variable method, a discontinuity regression design, and propensity score matching. Overall, our study highlights that air pollution is an important local environmental factor that affects firm innovation.