How air pollution makes firms less innovative: human capital and adaptive strategies

Abstract

This paper studies the long-term effects of air pollution on firms’ human capital accumulation and the adaptive strategies they adopt in response. Leveraging a spatial regression discontinuity (RD) design based on China’s Huai River heating policy and utilizing a novel dataset with detailed firm-level human capital information, we show that air pollution significantly reduces the share of R&D staff with advanced degrees, particularly PhD and master’s degrees. To offset these challenges, firms in more polluted regions increasingly turn to external strategies, such as acquiring technology and collaborating with universities, as well as internal measures, including expanding welfare subsidies for R&D staff and investing in experimental instruments. However, despite these adaptive efforts, firms in polluted areas still generate fewer innovations than their counterparts in cleaner regions. Overall, our findings highlight the role of internal human capital in sustaining innovative capacity.