Turning green subsidies into sustainability: How green process innovation improves firms' green image

Abstract Green process innovation has been seen as a key strategy for manufacturing firms to pursue sustainable development. Yet, how to help manufacturing firms eliminate bottlenecks when implementing green process innovation remains poorly understood. To address this issue, the current study, which is anchored in the government incentive perspective, examines the drivers, contingent conditions, and consequences of green process innovation by using the panel data of manufacturing‐listed firms in China from 2013 to 2017. The results present valuable findings: (a) green subsidies are positively related to two dimensions of green process innovation, namely, cleaner production technology and end‐of‐pipe technology; (b) both cleaner production technology and end‐of‐pipe technology are positively related to firms' green image; (c) a firm's cleaner production technology mediates the relationship between green subsidies and its green image; and (d) higher absorptive capacity strengthens the indirect effect of green subsidies on a firm's green image via cleaner production technology. Our results provide meaningful theoretical and practical implications by revealing the benefits of green subsidies through green process innovation by leveraging levels of absorptive capacity.