Abstract:     In recent years, with the intensification of resource scarcity and environmental pollution, the sustainable development of the Chinese economy is facing severe challenges. While promoting the vigorous development of China′s economy, heavy-polluting firms have also become the main source of industrial pollution in China. Therefore, it is urgent to promote the transformation of heavily polluting firms to a low-carbon, environmentally sustainable development model. Unlike traditional innovation, green innovation has positive significance for the survival and development of enterprises especially at reducing the environmental pollution. Therefore, green innovation has become the key to promoting the sustainable development of China′s economy. Nevertheless, the green and innovation system of our country is still in the early stages of development, superadd some uncertain features such as the high cost and high risk, which give rise to lower return than investment of the enterprise, and all resources for innovation is also hard to get. Therefore, the government lead enterprises to offering green and innovate activities through incentive and restraint policies, to promote the green development and alleviate the financing constraints of enterprises.
    On this basis, our paper takes the heavily polluting companies listed on the Shanghai and Shenzhen stock exchanges as the research sample, selects panel data from 2012 to 2017, and uses a zero-inflation negative binomial regression model to empirically test the impact of government subsidies on companies′ green innovation. Also, testing the role of political connections and environmental regulations in this process. Our results achieve three main conclusions: First, government subsidies have a significant U-shaped impact on the green innovation of China′s heavily polluting firms. When the subsidy scale is below a threshold, although the government subsidies promote the R&D investment of enterprise, it harms the output of green innovation. Only when the subsidy scale is higher than the threshold, will government subsidies have a significant positive effect on the green innovation of the enterprise; Second, the political connection weakens the U-shaped relationship between government subsidies and green innovation in which the stronger political association, the stronger weakening effect becomes; Third, environmental regulations also weaken the U-shaped relationship between government subsidies and green innovation, and as the intensity of environmental regulations increases, its weakening effect is more pronounced.
    Based on our findings, we make the following policy recommendation: (1) To reduce the crowding-out effect of small-scale subsidies，the government should adjust the allocation of resources and provide sufficient policy and financial support for heavy polluters to encourage them to carry out green innovation activities. (2) The state should guide an open and transparent relationship between enterprise and government, to make the government-enterprise association a true assistance to both sides. (3) The government should formulate differentiated regional regulatory policies to mitigate the adverse effect of environmental governance costs on enterprises, it will also stimulate enterprises′ enthusiasm for green innovation.
    The research in this paper is of great significance for promoting the green innovation of heavily polluting enterprises and realizing the harmonious and sustainable development of China′s economy and environment. Simultaneously，it also provides a scientific basis for optimizing China′s environmental protection policy.

Key words: government subsidy, green innovation, political connection, environmental regulation