Transparency has been heralded as a solution to economic policies, security issues, and human rights. Combining elements from institutional and signaling theories, we develop a theoretical framework which suggests that institutional changes regarding pollution transparency incentivize firms in emerging markets to go beyond first-order responses to this problem (i.e., green washing, reduce pollution temporary, or mask it via outsourcing) and take a more proactive stance by developing eco-innovations, i.e., new technologies targeting energy saving, emissions reduction, or other long-term environmental benefits. Moreover, we posit that the effects of these institutional changes will be more pronounced for internationally oriented firms (i.e., foreign-owned and exporting firms) given the learning and exploitation benefits associated with these activities. We test these hypotheses using a quasi-experimental design that takes advantage of a change in pollution transparency regulations in China in 2008 across 113 cities. Employing a large sample of Chinese manufacturing firms during the period of 2002-2013 across 338 cities we find support for our conjectures: pollution transparency increases both the incidence and intensity of firms’ eco-innovations in transparent jurisdictions, and that these effects are more pronounced for internationally oriented firms. These findings advance our understanding of the impact of institutional transparency and provide some concrete policy avenues for reduction of pollution.
