Environmental regulation and outward foreign direct investment: evidence from Chinese firms’ overseas mergers and acquisitions

ABSTRACT

While the literature shows that stricter environmental regulations deter exports and inward foreign direct investment (FDI), few studies examine the impacts on outward FDI, especially for developing countries. In this paper, we analyse this issue in the context of China, which is the largest developing country in terms of FDI. We collect the transaction-level data of all the overseas mergers and acquisitions (M&As) by Chinese firms from 2000 to 2019. For the identification of the causal effect, we exploit the implementation of the Environmental Protection Law in 2015 as a quasi-natural experiment and carry out the difference-in-difference-in-differences analysis (DDD). The results show significant impacts of stricter environmental regulations on outward FDI. When the provincial emission reduction target increases by 10% points, the number of overseas M&A transactions in the high-polluting industries has increased by 32 every year since 2015. Moreover, the investments are more likely towards countries with better environmental protection. This suggests that firms aim at gaining cleaner technologies via M&As rather than transferring pollution abroad.

KEYWORDS:

• Environmental regulation
• outward foreign direct investment
• mergers and acquisitions
• DDD

JEL CLASSIFICATION:

• F21
• Q58

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For instance, in the context of China, refer to Hering and Poncet (2014) and Shi and Xu (2018) for exports, and List and Co (2000), Eskeland and Harrison (2003), Javorcik and Wei (2004), Erdogan (2014), Cai et al. (2016) and Li et al. (2022) for inward foreign direct investments.

² Recently, Yu et al. (2021) and Dong et al. (2022) use DID method to analyse this issue in the context of China.

³ Notice that we also drop an industry labelled as ‘other services’ in the original dataset in Zephyr. We do this for two reasons. First, we do not know the specific definition of this category. The number of deals in this category is quite volatile over years and is an obvious outlier compared to other industries. It is possible that Zephyr classifies a deal into this industry when it cannot clearly identify which industry a deal belongs to. Second, there are abnormal increases of outward direct investments in some industries during the 2010s, which results in the Catalogue of industries sensitive to overseas investment issued by the National Development and Reform Commission in 2018. The Catalogue explicitly restricts oversea investment in real estate, cineplex, entertainment, sports club, platforms without entity projects, and so on. These industries are not included in the 21 industries of the dataset we use, and should be classified in the ‘other services’.

⁴ As a robustness check in section VI, we also use the actual industrial waste gas emission to characterize the pollution intensity in each industry. The data of waste gas emission is from the National Bureau of Statistics of China.

⁵ Data source: Yale Center for Environmental Law and Policy (YCELP), Yale University Center for International Earth Science Information Network (CIESIN), Columbia University, World Economic Forum. 2014 Environmental Performance Index [DB/OL]. http://dx.doi.org/10.7927/H4416V052014. 2014.

Additional information

Funding

The work was supported by the Beijing Municipal Social Science Foundation [22JJC030]; National Social Science Fund of China [23BJY233].