Many studies have been performed to explore how firms transform from a nongreen strategy to a green one, but there is no definitive answer. Aiming to untangle this complex process in the context of the strategy and belief that being green is an important endeavor, this study details how firms implement green strategy from product diversification to innovation under the pressure of environmental regulations. Consistent with our arguments, data from Chinese listed firms reveal that environmental regulations create pressure for resources and managerial skills to be split between diversification and innovation strategies, which leads to innovation at the cost of diversification. This tension is strengthened when the firm has insufficient slack resources and faces strong environmental dynamism. Furthermore, we find that the innovation strategy increasingly substitutes the loss of the downsized diversification strategy. In addition, these effects show the differences between sectors and the dynamic change over time.
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