Air pollution, sustainable development, and corporate R&D: Evidence from emerging countries.

ABSTRACT

This paper studies the adverse effect of air pollution on corporate research and development (R&D) and how sustainable development moderates this negative impact in emerging market economies (EMEs). Using a sample of 18 EMEs' firm-level data, the empirical results show that firms substantially reduce R&D expenses in the face of increasing air pollution, and this adverse effect becomes less pronounced with higher levels of sustainable development. Our analyses suggest that air pollution negatively affects R&D by increasing firms' difficulties in hiring highly skilled people or raising operation and production costs. Furthermore, we divide our sample firms into two groups according to some institutional quality factors related to sustainable development. The negative impact of air pollution on R&D is lower in countries with higher levels of institutional quality. Based on our research, to attract more R&D investment, EMEs should not only make an effort to manage air pollution but also invest more in human capital and improve their institutional quality to amplify the impact of their efforts.