Air Pollution and Firm-Level Human Capital, Knowledge and Innovation

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This paper investigates the long-run effects of prolonged air pollution on firm-level human
capital, knowledge and innovation composition. Using a novel firm-level dataset covering
almost all industrial firms engaged in science and technology activities in China, and
employing a regression discontinuity design, we show that prolonged pollution significantly
diminishes both the quantity and the quality of human capital at the firm level. More
specifically, we show that air pollution affects firm-level human capital composition by
reducing the share of employees with a PhD degree and master’s degree, but instead
increasing the share of employees with bachelor’s degree. Moreover, the difference in the
composition of human capital materially change the knowledge and innovation structure of
the firms, with our estimates showing that pollution decreases innovations that demand a high
level of creativity, such as publications and inventions, while increasing innovations with a
relatively low level of creativity, such as design patents. Quantitatively, on the intensive
margin, one μg/m3 increase in the annual average PM2.5 concentration leads to a 0.188 loss
in the number of innovations per R&D employee. Overall, we show that air pollution has
created a gap in human capital, knowledge, and innovation between firms in the north and
south of China, highlighting the importance of environmental quality as a significant factor for
productivity and welfare.

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