Government subsidies and green innovation in chinese enterprises based on the synergy of executive incentives

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Government subsidies and green innovation in Chinese enterprises-based on the synergy of

executive incentives

Hu Liu, Xiaoxuan Yu & Yijun Peng

To cite this article: Hu Liu, Xiaoxuan Yu & Yijun Peng (2023) Government subsidies and green

innovation in Chinese enterprises-based on the synergy of executive incentives, Asian Journal

of Technology Innovation, 31:3, 534-555, DOI: 10.1080/19761597.2022.2131586

To link to this article: https://doi.org/10.1080/19761597.2022.2131586

Published online: 10 Oct 2022.

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Government subsidies and green innovation in Chinese enterprises-based on the synergy of executive incentives

Hu Liu, Xiaoxuan Yu and Yijun Peng

International Business School, Shaanxi Normal University, Xi ’an, People’s Republic of China

ABSTRACT

Based on the micro data of China ’s heavily polluting enterprises

from 2010 to 2019, this article analyzes the synergistic e ffect of

government subsidies and executive incentives on green

innovation It is found that government subsidies signi ficantly

promote the output of innovation results, and this e ffect has a

time lag Executive compensation incentives will weaken the

current policy e ffect, and the benefit convergence effect

produced by equity incentives can reverse executives ’

short-sighted thinking Although the current impact of equity

incentives is not signi ficant, it can play a substantial synergistic

e ffect in the first and second lag periods It is proved that the

green innovation of heavy pollution enterprises can not only

consider the impact of exogenous policy but ignore the

perfection of internal governance mechanism.

KEYWORDS Government subsidies; green innovation; China ’s heavy pollution enterprise; compensation incentive; equity incentive

1 Introduction and literature review

According to the‘2021 Interim Report on the State of the Global Climate’ released by theWorld Meteorological Organization (WMO), the frequency and intensity of globalclimate extremes are rising rapidly, which may form a ‘dangerous compound effect’with the impact of the epidemic and economic recession The problem of environmentaldegradation deserves the vigilance of all countries in the world After more than 40 years

of rapid development of reform and opening up, China’s environmental carryingcapacity is gradually approaching the upper limit, and ecological governance is immi-nent China’s 2060 carbon neutrality strategy emphasises the importance of technology

in improving climate and environmental change, and clarifies that emission reductionneeds to shift from end-to-end governance to source control, and the growth modelfrom factor-driven to innovation-driven Therefore, green innovation has received alot of attention from Chinese academia Regarding green innovation, there is currently

no generally accepted definition in academia Early scholars mostly believed that greeninnovation is a new technology or new product with the premise of protecting the eco-logical environment and the pursuit of economic benefits With the extension and devel-opment of the concept of green innovation, green management innovation (such asgreen marketing, green supply chain, etc.) is gradually included in the category ofCONTACT Hu Liu liuhusnnu@163.com Shaanxi Normal University, International Business School, 620 West Chang ’an Street, Xi’an 710062, People’s Republic of China

https://doi.org/10.1080/19761597.2022.2131586

green innovation However, considering the research purpose of this article, the greeninnovation referred to in this article is more inclined to green technology innovation.Green equipment innovation, green product innovation, and green production materialinnovation all belong to the category of green technology innovation Compared withgeneral innovation, green innovation pays more attention to environmental benefits,that is, whether the damage to the environment can be reduced or avoided.

From the perspective of life cycle, green innovation should include the whole processfrom idea formation to market launch Green R&D is the capital invested for green inno-vation activities, and it is the beginning of enterprise green innovation activities Accord-ing to Hamamoto’s (2006) research and combined with the data of the‘China Scienceand Technology Statistical Yearbook’, the green R&D investment in China from 2000

to 2019 can be calculated, as shown inFigure 1 The green R&D investment generallyshows an upward trend, with an average annual growth rate of 15.27% The annualgrowth rate of general R&D investment is 18.41%, which is slightly higher than that ofgreen R&D investment, but there is a large order of magnitude difference between thetwo At this stage, China’s green R&D investment seriously underinvested Althoughgreen innovation is considered to be thefirst driving force to lead high-quality economicdevelopment and enterprise transformation (Guo et al.,2019a), the dual externalities ofgreen innovation and the profit-seeking nature of capital lead to the fact that enterprisestend to prefer economies of scale and short-term economic benefits while ignoring theenvironment protection in the process of development, lack of enthusiasm and initiative

to increase green R&D investment In addition, the lack of scientific research personnel,technology and funds also hinders the improvement of enterprises’ green governanceand innovation capabilities Since this article pays more attention to the results of enter-prise green innovation activities and the feasibility of measurement indicators, thenumber of green patents is selected to reflect the level of green innovation inFigure 2.The reason for not using green R&D is that the greater the number of green R&Ddoes not mean the more green patents According to statistics, the average annualgrowth rate of green patents in China from 2000 to 2019 is 24.07%, which is higher

Figure 1.Trend chart of R&D investment for green innovation in China

than that of common patents The number of green patents in 2019 is about 60 times that

of 2000 However, there is still a big gap with leading countries such as the United States,Japan and Germany

To solve environmental problems, China has formed a governance system led by thegovernment, dominated by enterprises, and participated by social organisations and thepublic The government has been revising and promulgating laws, regulations, and policymeasures for a long time, so as to incorporate environmental factors into the productionfunction of enterprises, and encourage or force green transformation of enterprises Gov-ernment subsidies and environmental taxes are the two main means of current govern-ment intervention SeeTable 1for details

In order to alleviate the financing constraints faced by enterprises and reduce thenegative impact of ‘market failure’, the Chinese central government and local govern-ments have widely adoptedfiscal and taxation policies to intervene in innovation entities

Figure 2.Trend chart of green innovation and other types of innovations in China

Table 1.Comparative analysis table of government subsidies and environmental taxes

Type Government subsidies Environmental tax-independent taxes in China Mechanism Resource Supplement Punitive pushback

Responsible

Department

Subsidy object Wide range of objects Enterprises, institutions and other producers and

operators that directly discharge taxable pollutants into the environment Challenge There is information asymmetry between the

government and enterprises, and it is di fficult

for the government to directly supervise the

use of government subsidy funds by

enterprises, and it is even di fficult to determine

whether the enterprises that receive

government subsidies really have the

corresponding quali fications.

Under the ever-increasing environmental protection supervision, in recent years, there has been a ‘one-size-fits-all’ approach in environmental supervision and law enforcement, such as companies shutting down polluting production activities to deal with the behaviour of the inspectors.

Government subsidies are free funds allocated by governments at all levels to enterprises.They are an ex-ante incentive for enterprises, and their smoothing effect on innovationhas also been questioned by many academic circles Scholars of the incentive view believethat the signalling effect of government subsidies makes enterprises more favoured by thecapital market (Xia & He,2020), easy to obtain external input, reducefinancing con-straints (Li et al., 2019; Montmartin & Herrera, 2015), and higher expected returnsenhance their innovation willingness (Yu et al., 2021a); secondly, the ‘leverage effect’hypothesis believes that the various review and evaluation mechanisms formulated bythe government around the subsidy policy are also conducive to improving the R&Dinvestment and economic performance of enterprises, and alleviating the opportunism

of enterprises in innovation incentives (Ding & Xie,2021; Yu et al.,2021b); furthermore,the government allocates the risk of innovation failure through R&D funds, affects theallocation of innovation resources, and then promotes R&D innovation (Du & Zhang,

2020; Hu & Deng,2019) Scholars who hold the inhibition view believe that the tal competition of local governments can easily lead to enterprise policy arbitrage, whichleads to policy failure and waste of public resources The serious‘patent bubble’ problemalso makes government subsidies and enterprise innovation choices fall into the‘prison-er’s dilemma’ (Hu & Jin,2021) The influx of a large number of government subsidies willalso reduce the risk-taking spirit of entrepreneurs and inhibit innovation performance.There are also differences in the investment goals of the government and enterprises,and the funds used for green R&D activities may be misappropriated or directlycrowded out of enterprises self-owned R&D funds (Liu et al., 2019) Different fromthe resources allocated by other market mechanisms, subsidies lack correspondingvalue appeals and are ‘inactive’ in innovation activities (Jourdan & Kivleniece, 2017).From the perspective of market supply, the increase in financial subsidies may alsolead to an increase in resource prices, a decline in marginal benefits, and an adverseimpact on innovation output The promotion and inhibition of government subsidiesand green innovation may occur successively (Huang et al., 2016; Wang & Wang,

horizon-2020b; Wu & Zhang,2021; Zhang,2020), property rights (Jin et al.,2018), scale (Pere,

2013), type of government subsidies (Lou et al., 2021), system quality (Bianchini et al.,

2019), the policy attention of enterprises will also cause differences in research results(Fu & Gao,2021)

In fact, the output of green innovation not only depends on the resource endowment

of enterprises, but also is affected by differences in internal governance of enterprises.From the principle of the dialectical relationship between internal and external causes,

we can see that the internal cause is the fundamental cause of the development ofthings, the external cause is the condition of change, which acts through the internalcause Therefore, only relying on external policies cannot fundamentally improve thegreen innovation performance of enterprises and promote the ‘greening’ process ofenterprises In recent years, scholars have also begun to pay attention to the impact ofinternal governance differences on green innovation For example, the shareholding ofstate-owned enterprises can promote the green governance of private heavily pollutingenterprises (Wang et al., 2022), and non-state-owned equity participation in state-owned enterprises also plays a positive role (Zhao et al.,2022); the stronger the execu-tives’ dual environmental awareness, the better at identifying and grasping the marketopportunities brought by green innovation, they also actively reflect on the shortcomings

of the enterprise’s own green development, and implement a green innovation strategy(Xi & Zhao, 2022); influenced by morality and ethics, green investors are willing toreduce interest demands, which can prompt enterprises to implement green actions,increase green expenditures, and improve green governance performance (Jiang et al.,

2021) In modern enterprises, senior executives hold a large part of the managementrights of the enterprise and become the makers and implementers of enterprisedecision-making In the case of information asymmetry, the existence of agency pro-blems makes executives more likely to focus on arbitrage for personal gain whenmaking decisions Risk aversion, high innovation failure costs, and lack of innovationcompensation mechanisms further weaken executives’ green innovation tendency Com-pared with stimulating innovation, stimulating green innovation is a more challengingproposition How to use the executive incentive mechanism to enable enterprise man-agers to actively carry out green innovation activities, improve the policy effect of govern-ment subsidies, and realise the‘green’, ‘ecological’ and ‘innovative’ of enterprise, has boththeoretical and practical significance

Therefore, this article takes heavily polluting enterprises as samples to explore therelationship between government subsidies and green innovation and the moderatingeffect of executive incentives on the two It may enrich and deepen the existing research

in the following aspects: (1) The empirical research conclusions on the effect of governmentsubsidies are quite different, and the existing literature on government subsidies and enter-prise green innovation is still relatively small, the effect of government subsidies in heavilypolluting enterprises needs more evidence to support (2)‘The Suggestions of the CentralCommittee of the Communist Party of China on Formulating the Fourteenth Five-YearPlan for National Economic and Social Development and the Long-term Goals for 2035’pointed out that the green transformation of key industries and key areas should be pro-moted in the future Therefore, this article takes the heavily polluting enterprises as theresearch object, and considers the macro-policy perspective (government subsidies) andthe micro-perspective of enterprises (executive incentives) to study the green innovation

of enterprises, which can provide some enlightenment for how to promote the construction

of ecological civilisation in China by improving the coordination of internal and externalmechanisms (3) This article analyzes the effect of government subsidies under differentexecutive incentive methods, which will help relevant government departments to effectivelyidentify enterprises before subsidies are issued, so as to reduce supervision costs and trans-action costs, and reduce the possibility of enterprises breaking the invisible contract

2 Theoretical analysis and research hypothesis

2.1 Government subsidies and green innovation

Dual externalities are the main reason for the low enthusiasm for green innovation in thecurrent heavily polluting enterprises From the externality theory, it can be known that ineconomic activities, if enterprises cannot enjoy all the benefits of decision-making orneeds to bear all the costs of decision-making, externalities will occur Knowledge andtechnology have positive externalities, the green innovation achievements of heavily pol-luting enterprises are also prone to spillover, leading to the widespread phenomenon of

‘free riders’ in the industry If competitors quickly imitate and reproduce at low cost, it

will greatly shorten the time for the enterprise to enjoy the technological advantages,market position and high economic returns brought by the green innovation achieve-ments, and even cannot make up for the enterprise’s early innovation investment,which greatly dampen the enterprise’s enthusiasm for green innovation This phenom-enon will become more prominent when the mechanism is relatively weak The negativeexternality of environmental pollution means that the pollution costs incurred by enter-prises in the production and operation process are not fully borne by the enterprisesthemselves Without being punished, enterprises lack the initiative to adopt green tech-nologies It can be deduced from this that without corresponding policy incentives andinstitutional constraints, the development and use of green technologies will be uneco-nomical for heavily polluting enterprises that are currently rational economies Inaddition, innovation activities require stable financial support, but the endogenousfinancing of heavily polluting enterprises is generally difficult to meet innovationneeds (Cao et al.,2021) China’s financial market is also seriously lagging behind indus-trial development, and the allocation of market resources has failed Therefore, govern-ment departments need to effectively intervene in the innovation activities of enterprises

by using government subsidies as an innovative resource supplement mechanism.Based on the resource-based view, government subsidies, as an ‘ex-ante incentive’measure, can provide enterprises with certain resources and directly alleviate thefinancing constraints of enterprises in a way of nearly zero financing costs, which is con-ducive to enhancing the green innovation ability and willingness of enterprises to inno-vate, leading them to increase the intensity of innovation investment, manage R&Dactivities in a refined manner, and accelerate the innovation process From the perspec-tive of‘signaling’ and ‘authentication effect’, government subsidies can reduce the nega-tive effects of information asymmetry In order to maintain a competitive advantage andprevent the leakage of core secrets, enterprises will strictly control the leakage of infor-mation before thefinal results are formed The complexity and opacity of the innovationprocess make it impossible for outside investors to judge the expected return of projectinvestment, resulting in increasedfinancing constraints (Hall & Lerner,2010) Govern-ment subsidy is equivalent to sending a signal to the market as an intermediary, that is,the enterprise is recognised and focused by the government, which is conducive toenhancing investor confidence, expanding enterprise financing channels, ensuring thenecessary capital investment for green innovation activities, reducing the marginalcost of R&D activities, and preventing the crowding of normal operating cash flow.From the perspective of cost and risk sharing, local governments use government subsi-dies to provide financial support for R&D activities, and share the risk of innovationfailure with enterprises Enterprises in the initial stage of transformation may need to

do some preparations for R&D activities, such as purchasing certain new equipment,hiring scientific researchers, and forming R&D teams Government subsidies are used

to reduce the sunk costs of enterprises and ease the pressure on capital flow In theprocess of‘learning by learning’ and ‘learning by doing’, the knowledge reserve of enter-prises increases dynamically and improves the possibility of successful innovation activi-ties in the future For enterprises that have already carried out R&D activities,government subsidies can reduce the marginal cost of enterprises, encourage moreR&D investment, compensate for losses caused by technology spillovers, bridge thegap between private benefits and social benefits At the same time, it helps enterprises

share the risks of innovation activities and reduces the probability of bankruptcy of prises after innovation fails In addition, the government will strengthen the regulationand supervision of enterprises that receive subsidies, further improving the efficiency

enter-of innovation output enter-of enterprises (Wang et al.,2017) Based on this, thefirst researchhypothesis of this article is put forward:

H1: Government subsidy plays a positive role in promoting green innovation of heavy lution enterprises

pol-2.2 Moderating effects of executive incentive

The incentive mechanism of executives stems from the first type of principal-agentproblem The income function of enterprise executives and shareholders is not consist-ent Shareholders can diversify their shares to diversify risks and obtain benefits Thewealth accumulation and career prospects of senior management depend on thesuccess or failure of the enterprise If the incentive contract cannot provide enoughincentives to offset the negative impact of the failure of green innovation activities, execu-tives may be‘lazy’ and ‘inaction’ in innovation activities due to career concerns Becausethe value-creating effect of green innovation is difficult to translate into observable per-formance of enterprises in the short term, executives’ ‘short-sightedness’ and lack ofawareness of green innovation will also affect enterprises’ decision-making choices andinvestment rankings How to implement effective incentives for senior managementhas always been a hot topic in the theoretical and practical circles If the internal incentivemechanism of the enterprise is ineffective, the implementation and operation costs ofgovernment subsidies will be increased, and it is difficult to achieve the best ‘greening’effect Innovation may even become a tool for executives to capture resources andpursue self-interest (Tong et al.,2014) According to existing research, executive incen-tives are mainly divided into compensation incentives and equity incentives The adjust-ment effects of different incentive methods are as follows

2.2.1 The moderating effect of compensation incentives

The executive compensation incentive mechanism is to establish executive compensation

on the basis of certain performance standards At present, Chinese executives are in thestage of wealth accumulation Compensation incentives link executives’ monetaryreturns with the short-term interests of the enterprise, and are believed to satisfy execu-tives’ wealth needs and curb their risk aversion tendencies, so that executives can performtheir duties diligently, make scientific and effective business decisions (Wang & Wang,

2020a), stimulate enthusiasm for work, and concentrate on strengthening the ment of R&D activities of enterprises Ultimately, the efficiency of using government sub-sidies is improved, while the ‘crowding out’ effect on the original R&D funds ofenterprises is weakened, and the probability of successful green innovation activities isincreased Although green innovation activities are beneficial to enterprises, it haslarge investment scale, long payback period and high risk, and cannot generate cashflow during the tenure of senior executives, which may have a negative impact on com-pensation incentives based on short-term performance The preference of executives forshort-term benefits such as salary and bonuses will reduce their risk tolerance, and even

manage-stick to conservative investment decisions in order to maintain the existing monetaryincome, and the development of core technologies will be locked back to low-end orien-tation Secondly, green innovation activities will increase the current cost of enterprisesand reduce investment in productive and profitable projects When business perform-ance declines, stakeholders such as shareholders will question the operational capabilities

of executives, and the career prospects and personal reputation of the executives will also

be damaged As a result, executives may respond negatively to the green innovationactivities of the company In the absence of strong support from senior executives, theinternal green innovation power of enterprises is insufficient, project operations lackplanning, and innovation efficiency is low Therefore, the role of government subsidies

in promoting green innovation in enterprises is weakened Accordingly, the secondresearch hypothesis of this article is put forward:

H2: The executive compensation incentive policy plays a significant negative role in ing the relationship between government subsidy and green innovation

regulat-2.2.2 The moderating effect of equity incentives

It is generally believed that equity incentives enable executives to obtain the distributionrights of residual income through shareholding, resulting in a convergence effect of inter-ests The long-term value of the enterprise and the personal value of the executives areunified, which enhances the sense of protagonist of the executives, encourages the execu-tives to reduce adverse choices in strategic decision-making, and make strategic decisionsthat are in line with the sustainable development of the enterprise Due to informationasymmetry, it is difficult for the government subsidy support mechanism to rely on exter-nal orders to carry out orderly development The green innovation funds given to enter-prises by government departments may be misappropriated to other projects, or have a

‘crowding out’ effect on the enterprise’s own R&D investment Even if there is externalsupervision, the use of subsidy funds and the management of green innovation activitiesare difficult to achieve an effective state, which increases the cost of supervision andreduces the efficiency of government subsidies When there is a reasonable equity incen-tive contract within the enterprise, it will increase the executives’ tolerance for short-termgreen innovation failures, and give incentive objects generous remuneration in the longrun, so that executives have strong green innovation motivation and strong willingness togreen governance Not only government subsidies are used for green innovation activi-ties, but additional R&D investment will be added Therefore, under the synergy of equityincentives, the positive effect of government subsidies on green innovation of enterprises

is magnified In recent years, environmental policies have become increasingly strict, andthe new Environmental Protection Law has introduced information disclosure mechan-isms for public supervision, which has improved the transparency of enterprise environ-mental information and significantly reduced the opportunistic behaviour of enterprises

to conceal environmental information (Wang et al.,2020) Local governments have alsotightened penalties for environmental violations Because the frequent exposure of enter-prise violation information will accelerate the depreciation of executives’ human capital,executives can make strategic choices to maintain enterprise reputation out of risk aver-sion considerations At the same time, the accumulation of negative environmental newshas led to a rising risk of stock price collapse (Yu & Bi,2021) In order to increase stock

prices to achieve asset preservation and appreciation, executives will be more proactive incarrying out green innovation activities Therefore, the third research hypothesis of thisarticle is proposed:

H3: Executive equity incentive policy plays a significant positive role in regulating therelationship between government subsidy and green innovation

Based on the above theoretical analysis and research hypotheses, a research frame ofthe relationship is constructed inFigure 3

3 Research and design

3.1 Sample selection and data source

This article selects 2010–2019 A-share listed companies in China’s Shanghai and Shenzhenstock markets with heavy pollution industries as the research object, and the heavy pol-lution enterprises are defined according to the sixteen subdivided industries such asthermal power, iron and steel involved in the Guide to Environmental Information Disclos-ure of Listed Companies issued by the Ministry of Environmental Protection in 2010.According to the division standard of the Guidance of Industry Classification of ListedCompanies issued by the CSRC in 2001, the corresponding secondary industries are com-pared, and then whether the listed companies have the attribute of heavy pollution industry

is judged In order to ensure the quality of the research data, the article further screened thesamples as follows: (1) Exclude enterprise samples that were ST and *ST during the sampleperiod; (2) Exclude the enterprise samples listed in 2011 and later; (3) Exclude enterprisesample with missingfinancial data After the above treatment, this article finally obtained

536 heavy pollution listed enterprises 5360 balance panel data The green patent applicationdata of listed companies comes from CNRDS, and other enterprise governance andfinancial data come from CSMAR At the same time, in order to avoid the influence of out-liers on the research conclusions, this article conducts Winsorize at the upper and lower 1%level for all continuous variables The data was processed using Excel2010 and Stata16.0

product output value to measure However, this method cannot accurately meet the need forresearch on the level of green innovation at the microcosmic individual level of enterprises(Xiao et al.,2021) The cost of green R&D input has not been measured and disclosed in thefinancial report, and it is difficult to separate from the R&D input of enterprises Therefore,this article selects the number of green patent applications to represent the green innovationcapability of enterprises In the process of data collation, this article can distinguish greenpatents and non-green patents by checking whether keywords such as‘energy saving’ and

‘emission reduction’ appear in documents such as corporate annual reports and patent cation materials The reason for not choosing the number of green patent grants is that cur-rently a patent usually takes 1–2 years from application to grant, and it is easily affected byexternal interference during the granting process, which is unstable In comparison, theenterprise green patent application process has already indicated that the enterprise is carry-ing out innovation activities So, the number of patent applications will more timely andreliably reflect the real green innovation level of enterprises than the number of patentgrants This article uses the sum of the current green invention patents and green utilitypatents of enterprises to measure green innovation, and adds 1 to the number of greenpatent applications in the regression model to take the logarithm

appli-3.2.2 Independent and moderator variables

(1) Independent variables In this article, the total amount of government subsidy disclosed

in the annual report of listed companies is used to measure the subsidy intensity.(2) Moderator variables For compensation incentive, this article draws on the method

of Guo et al (2019b), and uses the ratio of the total compensation of the top threeexecutives to the total compensation of all executives Due to the generally low share-holding level of executives in some listed companies, the total number of shares held

by executives is added by 1 and the natural logarithm is taken to measure equityincentives (Yin et al.,2018)

3.2.3 Control variables

(Table 2)

Table 2.Variable definition table

Dependent

variable

Green innovation Gpatent LN(1 + The number of green patent applications in the

current period) Independent

variable

Government subsidies Subsidy LN(1+ Total amount of government subsidies for the current

period) Moderator

variable

Compensation incentive Payinc Top three executive payroll/Executive payroll Equity incentive Shainc LN(1 + Total number of shares held by executives) Control variable Rate of return on total

assets

Roa Net pro fit/Total asset balance R&D input RD R&D input/Operating income Business Age Age The number of years from the enterprise ’s founding period

to the sample period Nature of property right Soe Virtual variable: 1 for state-owned enterprises and 0 for non-

state-owned enterprises Ability to grow TobinQ (Stock market value + Net debt)/Total assets