Foreign investment policy, market entry and corporate ESG performance

Abstract

This study examines the impact of foreign investment policies on the Environmental, Social, and Governance (ESG) performance of domestic enterprises, utilizing data from Chinese manufacturing listed companies spanning from 2013 to 2022. Employing a Difference-in-Differences (DiD) methodology for empirical analysis, the research reveals that the liberalization of foreign investment policies significantly enhances corporate ESG performance. This finding remains robust after conducting parallel trends tests, placebo tests, and robustness checks. The relaxation of foreign investment policies facilitates the market entry of foreign-invested enterprises and increases foreign capital penetration, thereby exposing domestic enterprises to stricter international environmental standards and regulatory requirements. Consequently, this leads to improved environmental performance and elevated social reputation and brand value for domestic firms. Mediation analysis indicates that foreign market entry plays a pivotal role in the influence of foreign investment policies on ESG performance. Heterogeneity analysis further demonstrates that state-owned enterprises (SOEs) experience a more pronounced improvement in ESG performance compared to non-state-owned enterprises (NSOEs) under the relaxation of foreign investment policies. This research offers valuable insights for governments in formulating foreign investment policies and for enterprises in enhancing their ESG performance, emphasizing the need to continue advancing the liberalization of foreign investment policies and encouraging domestic enterprises to learn from foreign advanced experiences and technologies to achieve sustainable development.