Green Innovations’ Differential Roles in Shaping Firm Productivity under Environmental Law via Optimized PSM-DID

This study utilizes both cross-sectional and year-by-year settings of Propensity Score Matching with Difference-in-Differences (PSM-DID) method to analyze the impact of the 2015 Environmental Protection Law (NEPL) on green innovations and total factor productivity in heavy polluting firms within manufacturing industries, spanning 2010–2018. Employing the Cobb-Douglas production function framework, it posits green innovation as a crucial technological resource augmenting tangible assets and technological productivity. The analysis reveals differentiated effects of NEPL on various types of green innovations: a negative impact on alternative energy and green transportation patents, while energy-saving and waste management patents remain largely unaffected. This suggests a crowding-out effect of environmental regulations on certain green innovations. Interestingly, heterogeneity analysis shows that smaller, less profitable heavy-polluting firms economically gain more from green innovations, particularly in waste management and energy-saving, while strict policies pose challenges for the alternative energy sector, highlighting the need for diverse, more supportive and adaptive policy approaches.