Air pollution and innovation performance of Chinese cities: human capital and labour cost perspective

Environmental protection and innovation performance are key issues that affect the sustainable development and value growth of cities. Using data of 272 prefecture-level cities during 2002-2016 and 2,169 listed companies, and the air ventilation coefficient and government environmental regulations, as the instrumental variables for PM_2.5 concentrations, this paper applies two-stage OLS (2SLS) to investigate how air pollution affects China's technological innovation and its realization mechanism. The results indicate that the rise in air pollution significantly inhibits the technological innovation level of regions as a whole as well as individual enterprises. When considering the spatial effect of the spread of PM_2.5 concentrations, due to positive spillover effects on innovation activities, the spread of air pollution has negative impacts on technological innovation activities in surrounding cities. Human capital and labour costs are important channels through which air pollution influences China's technological innovation. The implementation of pilot carbon trading policies can effectively reduce air pollution and then contribute to the achievement of the goals of the green growth strategy.