The Mist of corporate innovation

This study investigates the impact of air pollution on corporate innovation. Using the satellite generated Particulate Matter 2.5 concentration data in 390 cities in China over the period of 2000–2015, we find that severe air pollution (haze pollution) in a region may deteriorate the innovative performance of companies in the same region. Our results are robust to different air pollution and innovation measures. We employ both difference in differences and instrumental variable approaches to alleviate potential endogeneity concerns. In addition, we identify two possible mechanisms, reduced funds availability and loss of innovative talents, to explain the negative impact of air pollution on innovation.