Officials’ ecological assessment, regional environmental regulation and corporate green innovation

by Qiuyue Yang*

Introducing research projects of CGR PhD members.

The environmental pollution problems are still prominent in China. In recent years, the central government has tried to guide local governments to reshape their ecological management system by establishing the Central Environmental Inspection System and River Chief System, improving Carbon Emission Rights Trading Market, and implementing Eco-compensation Program. However, these “carrot and stick” policies have poor effects, and the ecological imbalance problems have not been fundamentally solved. Some scholars believed that China’s special government performance evaluation system and irregular officials flow mechanism are important reasons for the long-term ineffective pollution control (Huang et al., 2019). Specifically, Chinese officials’ promotion and turnover can be regarded as a performance-based tournament in which the promotion of local officials is highly linked with the economic growth of their jurisdictions (Li et al., 2019). This creates a strong linkage between local officials’ private interests and regional economic development (Li and Zhou, 2005), so local officials compete over targets for short-term economic growth at the expense of ecological environment to gain career promotion (Liu and Jin, 2015). Therefore, the key to promote the reform of Chinese environmental governance system is to establish an effective officials’ ecological assessment system, to solve information asymmetry problems regarding environmental governance, and to incentivise corporate green innovation.

Against this background, Chinese central government explores ways to implement natural resource audits when leading officials leave their positions, and in 2014 officially launched the pilot project Accountability Audit of Natural Resource (AANR). During the period from 2015 to 2017, the pilot work of AANR was implemented in stages and steps. In 2018, the regular officials’ ecological assessment system was formally established. The central government implements AANR policy, which directly acts on local officials rather than firms, and local officials further transmit their pressure on environmental governance to industrial enterprises. In detail, the AANR policy links the territorial responsibility of environmental protection to officials’ promotion, which encourages officials to strengthen environmental governance, incentivising enterprises to invest in green innovation activities.

Figure 1 AANR policy.
Source: image from http://epaper.hyqss.cn/html/2017-11/30/content_7_17.htm

Local officials may take punitive and environmental governance measures to improve corporate green innovation capability, including the (1) “Strong supervision strategy” (command-and-control) and, (2) the “Flexible regulation strategy” (market-based). According to the former strategy, local officials may implement stricter environmental regulation by administrative orders to transmit environmental governance pressure to industrial enterprises, such as strengthening the supervision of firms’ pollutant discharge, raising pollution discharge standards, and imposing stricter punishment on polluters. In this case, enterprises may improve productivity and green innovation capacity to reach the environmental standards, namely the driving effect. According to the latter strategy, local officials may increase environmental subsidies to give support for corporate green innovation. Companies in green sectors may receive more environmental subsidies. Government environmental subsidies compensate for insufficient corporate resources, reduce environmental protection costs, lower environmental investment risks, and enhance the enthusiasm of enterprises for environmental protection, thereby motivating enterprises to invest in green innovation activities, namely the incentive effect.

Figure 2 Logical diagram of AANR policy and corporate green innovation. (Source: compiled by the author)

The existing literature aims to explore the impact of formal environmental regulations on firms’ green innovation, but few studies include officials’ ecological assessment into research scope. The AANR is an innovative policy of officials’ ecological assessment proposed by China, and the relevant research only focuses on the basic concept, main framework and implementation strategy of this policy (Chen, 2014; Huang, 2016; Liu and Wang, 2017). The empirical research on the policy effect mainly includes three aspects: environmental quality (Huang et al., 2019), corporate environmental investments (Sun, 2019), and financial management behavior (Liu and Xie, 2018), lacking analysis and evaluation on the green innovation effect of officials’ ecological assessment system.

My research aims to study the impact of officials’ ecological assessment on corporate green innovation, and clarify whether officials’ ecological assessment influences corporate green innovation through strengthening environmental governance. Methodologically, I treat AANR policy as a quasi-natural experiment and evaluate its effect on green innovation by using detailed data on green patent applications of China’s A-share listed industrial enterprises. More importantly, I try to examine whether under the AANR policy, local officials choose “strong supervision strategy” or “flexible regulation strategy” and their effects on green corporate innovation.

* Qiuyue Yang is a PhD student from School of Economics, Huazhong University of Science and Technology, visiting Queen Mary University under the supervision of Dr. Caterina Gennaioli.

References:

Chen, X. D. (2014). Thinking about carrying out accountability audit of natural resource. Auditing Research. 5, pp. 15-19.

Sun, Y. P. (2019). Policy effect research of Accountability Audit of Natural Resource: Theoretical analysis and empirical evidence. Dongbei University of Finance & Economics

Huang, R. B. (2016). Research on accountability audit of natural resource based on PSR model. Accounting Research. 7, pp. 89-95.

Huang, R. B., Zhao, Q. (2019). Wang, L. Y. Accountability Audit of Natural Resource and air pollution control: Harmony tournament of environmental protection qualification tournament. China Industrial Economics. 10, pp. 23-41.

Li, H. and Zhou, L. A. (2005). Political turnover and economic performance: The incentive role of personnel control in china. Journal of Public Economics. 89(9), pp. 1743-1762.

Li, X., Liu, C., Weng, X., Zhou, L. A. (2019). Target setting in tournaments: Theory and evidence from China. The Economic Journal, 129(623), pp. 2888-2915.

Liu, R. B., Wang, H. B. (2017). Analysis of audit of outgoing leading officials’ natural resources accountability. Auding Research. 4, pp. 32-38.

Liu, W. J., Xie, B. S. (2018). Does local governors’ Accountability Audit of Natural Resource affect earnings management for listed companies? Journal of Zhongnan University of Economics and Law. 1, pp. 13-23.

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