Environmental regulation and OFDI: Evidence from Chinese listed firms

Abstract

Exploiting the 11th Five-Year emission reduction targets as a policy shock, this paper applies a propensity-score-matched difference-in-differences (PSM-DID) model to estimate the effect of environmental regulation on outward foreign direct investment (OFDI) of Chinese listed firms. Our findings are as follows. (1) Stricter environmental regulation in the home country has increased the probability of firms’ OFDI, and several robustness checks confirm our findings. (2) Further mechanism analysis shows that environmental regulation mainly boosts OFDI by enhancing firm innovation while compliance costs play a relatively minor role. (3) Heterogeneous tests indicate that this positive impact is stronger for small-scale firms, private firms and firms located in western region of China. This study deepens the theoretical study on the motivations of China's OFDI and provides enlightenment for environmental policies in developing countries.