Along with the rapid economic development, environmental pollution comes with it. Faced with serious environmental problems, the Chinese government has shown an unprecedented attention, specifically to the role of firms in pollution control. As reported in the 14th Five-Year Plan, the government should strengthen the establishment of corporate environmental governance responsibility systems, and guide social organizations and the public to participate in environmental governance. In addition, the government also promotes firms to implement environmental protection activities through a variety of channels, including adopting compulsory environmental regulations (Delmas and Montes-Sancho, 2011) and sending legitimacy signal to guide firms to implement active environmental strategies (Marquis and Qian, 2014). Faced with environmental regulatory pressure and legitimacy requirements, most firms will increase environmental protection investment or participate in environmental innovation activities (Berrone et al., 2013).

On the other hand, after the reform and opening up, China’s total economic volume has risen rapidly, but the quality of economic and social development is still lacking due to the lack of overall independent innovation capabilities. Under the new situation that China’s economy is shifting from high-speed growth to high-quality growth, the Chinese government has placed innovation at the center of the national development and actively guided firms to participate in innovation activities. Innovation is not only an important driving force for the development of social productivity, but also an important force for the transformation of social production relations and the development of human culture, and hence has important social benefits. However, innovation is fraught with uncertainty and has a high risk of failure (Holmstrom, 1989), and is influenced by many factors, such as corporate and public governance (Jia et al., 2019), the nature of ownership (Choi et al., 2011), government support (Ji and Miao, 2020) and political connections (Hou et al., 2017). The government provides policy guidance for corporate innovation, and the resources it has are also an important factor in supporting corporate innovation activities, such as special government subsidies for firms to promote technological innovations in specific government-encouraged areas.

Existing research shows that the survival and development of organizations need resources. However, the organization does not usually produce such resources, and its performance depends on its ability to interact with the environment to obtain key resources (Hillman et al., 2009). The same is true for corporate innovation. When a firm lacks sufficient resources to maintain innovation activities, its innovation performance will suffer huge losses. In China, most of these resources are controlled by the government (Li et al., 2008), and the allocation of resources is inefficient, so that firms with better institutional legitimacy may receive more resources, such as government subsidies (Lin et al., 2015). Therefore, proper interaction with the government is one of the important means of obtaining resources.

We have mentioned that environmental pollution has attracted important attention from the Chinese government. Facing the government’s environmental protection appeal, appropriate feedback on government behavior is one of the important channels for firms to obtain the institution legitimacy (Marquis et al., 2011). In China, the lack of a sound legal governance system makes the government’s decision-making process less transparent and inefficient in the allocation of some resources (He and Tian, 2008). In order to obtain resources and reduce the uncertainty in the business process, firms may choose to actively respond to the government’s call to obtain legitimacy and important commercial resources (Marquis and Qian, 2014). Therefore, we argue that firms that choose to increase environmental investment are more likely to obtain institutional legitimacy and government subsidies. As a key political resource, government subsidies can provide sufficient financial support for the innovation activities and help firms reduce the costs and risks during the innovation process (Wang et al., 2017). We propose:

Hypothesis 1

Increasing investment in environmental protection can help firms obtain more government subsidies, thereby improving corporate innovation.

In order to investigate the impact of environmental investment on corporate innovation, A total of 31,024 Chinese industrial firms from 1998 to 2008 were used as the research sample. During the 10 years from 1998 to 2008, the Chinese government issued the Ninth and Tenth Five-Year Plans, which have been mentioned many times to increase environmental governance and guide firms to control environmental pollution, providing us an ideal context to test our hypotheses. The industrial firm data was collected from the Annual Census of Industrial Enterprises (ACIE), which includes all industrial firms above designated size in China. Corporate environmental data came from the Environmental Survey and Reporting (ESR) database compiled by the Ministry of Ecology and Environment of China. Corporate patent data was sourced from the Chinese Patent database. Regional characteristic data were obtained from the “China Statistical Yearbook” and the “China City Statistical Yearbook.”

In order to test the role of environmental protection investment and government subsidies on corporate innovation, this study used a stepwise test coefficient method to test the mediating role of government subsidies between environmental investment and corporate innovation performance with a bootstrap model to perform 500 cycles of calculation (Baron and Kenny, 1986). We conducted an ordinary least-squares (OLS) regression absorbing year-level and industry-level fixed effect with a robust variance covariance estimator. The model was set as follows: Corporate innovation = β 0 + β 1 Environmental   investment + β 2 Controls + ε Government   subsidies = β 3 + β 4 Environmental   investment + β 5 Controls + ε Corporate innovation = β 6 + β 7 Environmental   investment + β 8 Government   subsidies + β 9 Controls + ε where β 1 , β 4 , β 7 and β 8 are used to test Hypothesis 1 ; “Controls” is the set of control variables; ε represents the random error term.

Table 1 reports the results of descriptive statistics and correlations of all variables. It can be seen that environmental investment and corporate innovation are positively correlated (p < 0.05), and the correlation coefficient between the independent variable and any other variables is less than 0.5. In addition, the average value of the variance inflation factor (VIF) is 1.28, which is significantly less than 10. Therefore, the risk of multicollinearity in this study is excluded.

Table 2 reports the regression results estimated by government subsidies and corporate innovation. Hypothesis 1 states that environmental investment can improve corporate innovation performance through obtaining government subsidies. As shown in Model 2, the coefficient on environmental investment is positive and significant at the 0.1% level ( β = 0.166 , p < 0.001), suggesting that firms investing more in environmental protection can receive more government subsidies. In Model 3, the coefficient on government subsidies is positive and significant at the 0.1% level ( β = 0.008 , p < 0.001), suggesting that firms that received more government subsidies can have better innovation performance, thus supporting for Hypothesis 1 .

We also conducted several analyses to test the robustness. An alternative measure of the dependent variable to check the significance was used in the regression (Yao et al., 2021). In Models 4–6 of Table 2, we used the natural logarithm value of new product sales revenue to measure corporate innovation and found that the results remained similar. Furthermore, government subsidies and patents may have many zero values. To fill this gap, we used a Tobit regression for robustness check. As show in Model 7–9 of Table 2, the regression results still support for Hypothesis 1 .

The main contribution of this study is that we emphasize the mechanism for firms to obtain effective resources to promote innovation through environmental investment, which enriches the knowledge in the literature of both corporate environmental management and innovation (Staub et al., 2016; Boone et al., 2019). Furthermore, compared with the previous literature focusing on the economic benefits of environmental, social and governance (ESG) investment (Baron and Kenny, 1986), we pay more attention to its social impact.

More practically, this study responds to the call for environment protection, and provides new insights for policy makers to better manage corporate environmental action. For firms, this study provides empirical evidence for how firms can interact with government effectively to obtain external resources and improve corporate innovation.

Our study has some limitations. First, our sample only includes the industrial firms above designated size and lacks the consideration for some small and medium-sized firms, which should be considered for future research. Second, considering the diversity of pollutant emissions, we have limitations in capturing corporate wastewater treatment facilities to measure environmental investment. Future research may consider more effective indicators to measure corporate environmental investment.