Do Political Connections Promote Innovation in Environmentally Polluting Enterprises?

• Author: Xiaoqing Li,Penghua Qiao,Jianhua Zhang,Hung‐Gay Fung
• Published date: 01 May 2019
• DOI: http://doi.org/10.1111/cwe.12281
• Date: 01 May 2019

China & World Economy / 76–101, Vol. 27, No. 3, 2019

76

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

*Jianhua Zhang, Professor, School of Economics and Management, Northeast Petroleum University, China.

Email: dqzhangjianhua@126.com; Xiaoqing Li, Professor, College of Economy and Management, Hebei

University of Technology, China. Email: lixiaoqinghb@126.com; Hung-Gay Fung, Professor, College of

Business Administration, University of Missouri-St. Louis, USA. Email: fungh@msx.umsl.edu; Penghua Qiao

(corresponding author), Associate Professor, School of Business and Economics, Kunming University of Science

and Technology, China. Email: oldbridge1221@126.com. The authors acknowledge nancial support from the

Heilongjiang Province Natural Science Fund (No. G2016002), the Northeast Petroleum University Innovation

Team Project (No. KYCXTD201805), the Humanity and Social Science Foundation of the Ministry of Education

of China (No. 17YJC630112) and the National Natural Science Foundation of China (No. 71702084).

Do Political Connections Promote Innovation in

Environmentally Polluting Enterprises?

Jianhua Zhang, Xiaoqing Li, Hung-Gay Fung, Penghua Qiao*

Abstract

We use an unbalanced panel data analysis to examine the effect of political connections

(PCs) in state-owned enterprises (SOE) and non-SOEs on the innovation of Chinese

environmentally polluting enterprises listed on the Shanghai and Shenzhen Stock

Exchanges from 2007 to 2016. Our sample consists of 792 firms and 4587 firm-year

observations. There are several interesting findings. First, SOEs that are politically

linked to the central government promote more innovation in general and more

environmental innovation than SOEs without these links. Second, privately-owned

enterprises (non-SOEs) with PCs promote less environmental innovation than non-

SOEs without PCs. Third, environmental regulation does not affect the environmental

innovation of SOEs but it drives non-SOEs with PCs to become more environmentally

innovative. Our results enable us to better understand how PCs and regulations affect

environmental innovation.

Key words: environmental innovation, environmental regulation, highly polluting

enterprises, political connections

JEL codes: G28, G31, G32

I. Introduction

Most highly polluting industries, such as power generation, thermal production and

metal production, as well as petroleum processing and chemical manufacturing, are

major contributors to the GDP in China, which is the leading global manufacturing

Political Connections and Pollution 77

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

hub. At the same time, enterprises in the most highly polluting industries are also major

contributors to industrial pollutant emissions (Chen and Hu, 2016). Environmental pollution

of the air and water has become a huge management problem for the Chinese government.

Ten of the world’s top 20 cities with the worst air pollution in 2016 were located in China. Air

and water pollution cause cardiovascular disease, lung cancer and infections that in 2016 led

to more than 4 million deaths globally (Roston and Tartar, 2018).

The Chinese government has passed numerous environmental laws and regulations

requiring enterprises to promote a cleaner environment. The challenge for enterprises in

the most highly polluting industries is how to deal with environmental issues and satisfy

legal requirements. A key issue of concern for enterprises is how to manage the high cost

of maintaining environmental standards. For example, in the power industry, Chinese

enterprises of different sizes face different levels of production capacity. For enterprises

with installed production capacity of more than 1 gigawatt, the cost of denitrication per

unit estimated by the government is 1.32–1.73 cents/kilowatt hour (kWh). The Chinese

government provides enterprises at that level of production capacity with a subsidy of 1.5

cents/kWh, based on the average estimated cost. In reality, the cost of denitrication per

unit is 1.62–2.09 cents/kWh, which is higher than the government subsidy (Hao et al.,

2016); thus enterprises have to cover the gap, subsequently reducing their prots.

The high cost of keeping the environment clean adversely affects enterprises’

protability. An effective approach to mitigate such costs in the most highly polluting

industries is through innovation. New and effective innovations can help to reduce

the cost of keeping a clean environment over time and are the only way to achieve

sustainable development in the long run. But engaging in innovative activities, such

as research and development (R&D), incurs high expenditure in terms of investment

and time; it also entails substantial risk as R&D may not necessarily lead to success in

obtaining patents or devising new approaches to reduce costs (Qiao et al., 2013).

The risky nature of R&D and the high cost of a clean environment create two

different choices for enterprises. The rst group takes its social responsibility to keep

the environment clean seriously, thus they often voluntarily conform to government

policies. These enterprises are primarily state-owned enterprises (SOEs). In the most

highly polluting industries, the largest enterprises are SOEs, which faithfully adhere

to the state’s environmental protection policy. Executives of SOEs are appointed by

the government, and tend to adjust strategies to invest in environmental R&D to meet

government standards. This is particularly true for SOEs controlled by the central

government (central SOEs), which can provide them with the resources to engage in

R&D. Thus, central SOEs are expected to participate in greater innovation, particularly

environmental innovation, than other enterprises, including local SOEs.