The influence of environmental management system on outward foreign direct investment: Evidence from ISO 14001 certification in China

Abstract

This study examines the influence of ISO 14001 certification, as a form of private regulation, on firms’ outward foreign direct investment (OFDI). Drawing upon the signaling theory, we conjecture that ISO 14001 certification can be an important channel to signal environmental commitments to foreign stakeholders, thereby alleviating liabilities of origin and facilitating OFDI activities. Using a sample of Chinese-listed firms, we find strong evidence that the adoption of ISO 14001 is significantly associated with a higher propensity to conduct OFDI. Moreover, our moderating test suggests that the positive effect of ISO 14001 certification on OFDI is moderated by firm ownership and the international experience of managers. We find state ownership serves as an incongruent signal that attenuates the signaling effect of ISO 14001 certification on OFDI propensity, whereas the international experience of the top management team can be a congruent signal that reinforces the positive signaling effect. Collectively, our findings highlight that the certification of the environmental management system to ISO 14001 is a new yet paramount program that shapes firms’ investment decision-making, which offers timely managerial and policy implications on firms’ green management to dedicate environmental protection in the context of global climate change.