Opening the black box: the impacts of environmental regulations on technological innovation

Whether environmental regulations (ERs) can stimulate technological innovation (TI) is the key for realizing the win-win strategy between economic development and environmental protection. This study seeks to analyze the impacts of ERs on TI. Though previous literature has highlighted that the black box of TI can be decomposed into technology investment and technology transformation, further empirical studies on such a decomposition has largely been ignored. Moreover, a detailed discussion of the links between ER and the decomposed components of TI has not been conducted in developing countries such as China. Our study attempts to address these research gaps by (i) decomposing TI using a novel DEA procedure and to further analyze the impacts of ERs on the decomposed components of TI, and (ii) apply this novel methodology to Chinese context. Accordingly, this study is conducted in two stages. First, a novel application of the slack-based Network DEA model is developed to uncover the black box of TI using Chinese data; to estimate the overall efficiency of technological innovation (TIE) and decompose it into the efficiency of technology investment (TVE) and the efficiency of technology transformation (TTE). Second, a random effect Tobit model is applied to (i) investigate both the linear and non-linear impacts of ERs on TIE in all sectors, and (ii) examine whether the impacts of ERs on TVE and TTE in different sub-processes are heterogeneous or not. Our results have brought out the benefits of decomposing TI; while technology transformation in China closely follows the trend of TI, the trend of technology investment is somewhat different. The estimation results further indicate that the impacts of ERs on TIE are non-linear. Besides, ERs have heterogeneous impacts on the decomposed components of TI. The impacts of ERs on TVE are non-linear, whereas the impacts of ERs on TTE become insignificant.