The impact of air quality on innovation activities in China

Abstract

Severe air quality hurts human capital and threatens innovative outcomes. Using unique data containing 12.8 million patent applications in China, this paper examines the causal effect of particulate matter with a diameter of 2.5 μm or less (PM2.5) on patent innovation. We estimate a two-stage least square model with thermal inversion as an instrumental variable. Our findings show that a one μg/m3 increase in the annual average PM2.5 concentration leads to a 1.3% decrease in the number of patents. Annual fluctuations in PM2.5 concentration levels across cities caused the total number of patents to decrease by 1.1% during the 2006–2010 period. From 2011 to 2015, the improvement in air quality increased the number by about 2.0%. It demonstrates another innovation co-benefit of improving air quality due to the tightened regulation.