This paper taked A-share listed companies from 2008 to 2022 as the research object, and adopted the multi- period difference- in- difference method to study the impact of transboundary ecological compensation on green innovation of enterprises in the compensated area. In addition,the mechanism of policy impact is explored in terms of internal and external resource allocation effects. The results show that there is a significant positive impact of the policy on green innovation of firms in the compensated area, which is mainly achieved through increasing firms’ cash flow and optimising the allocation of external resources. After a series of robustness tests such as PSM-DID,placebo test, and replacement of explanatory variables, the conclusion still holds. Large-scale enterprises, non-state-owned enterprises and enterprises in the eastern region are more responsive to policies, and policies have a more significant impact on the number of green innovations,meanwhile, there is a phenomenon of green innovations crowding out other types of innovations within enterprises.