This paper embeds environmental compliance factor and compliance cost factor into the M-O monopolistic competition and multi-product firm model to construct a theoretical model applicable to environmental compliance and enterprise innovation. In addition, we also construct a new environmental compliance index. We use the random-effects Tobit model and the double hurdle model to empirically test the micro-data from the Database of China Industrial Enterprises from 1998 to 2013, then we use the Generalized Propensity Score Matching (GPSM) to conduct a robustness test. The robustness conclusion is that environmental compliance has a significant U-shaped relationship with enterprise innovation, which means, environmental compliance will inhibit enterprise innovation on the left of the inflection point of environmental compliance (0.669), while environmental compliance on the right of the inflection point will promote enterprise innovation. The sub-sample regressions show that, enhanced environmental compliance of state-owned enterprises, mature enterprises, core area enterprises and export enterprises with low level of the environmental compliance, makes the greater inhibition to enterprise innovation, and enhanced environmental compliance of above enterprises with high level of the environmental compliance, makes the greater contribution to enterprise innovation. To this end, the government should adopt the policy, from the shallower to the deeper, to promote the construction of environmental compliance, and identify the inflection point of the environmental compliance on enterprise innovation to stimulate the role of environmental compliance in promoting enterprise innovation.
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