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Abstract China has emerged as the world’s second-largest economy due to its rapid industrial expansion and phenomenal economic growth in recent decades. Though, this exponential economic turnaround has been fueled by widespread energy consumption, making China among the largest pollutant emitters in the world. Chinese enterprises have come under greater scrutiny and the government has mandated Chinese companies to undertake environmental protection investment. However, little is known that how these mandatory environmental investments affect Chinese firms’ ability to undertake R&D expenditures. This study employs data of China’s A-share listed firms during 2008-2016 to examine the nexus between environmental protection investment and corporate innovation. Our findings conjecture the crowding-out effects of environmental investments on enterprise innovation-related expenditures. Furthermore, additional empirical testing reveals that R&D undertakings of state-owned and politically connected firms are not affected by environmental investments. Likewise, corporate innovation activities are not negatively influenced by environmental investments in polluting industries. The study findings offer fresh insights to regulators, corporate managers, and stakeholders. Our results are robust to alternate econometric specifications and alternate variable specifications.
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