Escape or adapt? green innovation and pollution transfer within business groups

Environmental regulation is a central tool for reducing pollution, and green innovation is a key pathway through which societies seek to decouple growth from environmental harm. Understanding how regulation shapes innovation is therefore a foundational question across the natural and social sciences. Prior work shows that stricter regulation can spur cleaner technologies, but it also highlights firms’ capacity to adjust operations across locations. Business groups, which coordinate multiple subsidiaries, can move capital, personnel, and innovative activity internally when regulations differ across regions. Yet how such intra-group reallocation affects green innovation remains poorly understood. This study examines whether heterogeneous environmental regulation within business groups weakens the innovation response that regulation is intended to induce. Using manually matched subsidiary-level data on Chinese listed business groups from 2003 to 2015 and the staggered pollution fee reform as a quasi-natural experiment, evidence indicates that subsidiaries in less regulated regions reduce green innovation when sister firms face tighter regulation. This result contrasts with the prevailing assumption that stronger regulation uniformly increases green innovation, and instead reveals a within-group “evasion” channel that reallocates innovation away from stricter jurisdictions. At the same time, overall pollution reduction remains significant, especially in heavily polluting industries, indicating that emission control and innovation responses can diverge. Mechanism tests point to transfers of core R&D personnel, tighter internal capital allocation, and higher compliance costs as the proximate drivers, with stronger effects in groups with shorter control chains and in invention patents. More broadly, the findings suggest that spatially uneven regulation can reshape the geography of innovation within firms, not just the geography of production. The results speak to regulatory design in any setting where multi-unit firms operate across jurisdictions and can reallocate innovation internally.