LAUSR

Abstract The Porter hypothesis asserts that well-designed regulations can foster innovation for a “win-win” solution, but it requires environmental regulations to be strict but flexible, which is impractical for most developing countries. This paper explores how environmental regulations in a developing country can spur corporate innovation. Using the geographic distribution of wars during 1644 and 1911 as an instrument, we document that the stringency of environmental regulations in China promotes corporate innovation only when interacted with a region with high corruption. We further identify that the causal effect of the stringency on corporate innovation is mediated by bribery expenditures statistically and economically, and all the corresponding direct effects are insignificant. Ultimately, this paper confirms that corruption is the key mechanism in the Porter effect in a developing country.