From pollution halo to haven: Two-sided environmental spillovers of foreign firms in China

Abstract

This study replicates and extends the analysis of Kim et al. (Journal of International Business Studies, 53(7): 1370–1393, 2022). Kim et al. (2022) provide evidence that the presence of foreign firms improves the environmental performance of nearby domestic firms, using data on industrial enterprises in Jiangsu, China from 2000 to 2007. This study examines whether this relationship holds over a longer period and across a broader geographic scope. We first replicate their analysis using the original data source, then extend it to a nationwide panel of industrial firms from 2000 to 2013. We find that the proximity of foreign firms improves local firms' environmental performance when foreign firm activity, measured by sales or numbers, is relatively low. However, beyond a certain threshold, some foreign firms appear to loosen environmental standards to gain competitive advantage, prompting imitation by local firms and leading to higher emissions. We also show that community-based and industry-based institutional channels significantly moderate these spillover effects. These findings contribute to the literature on the environmental impact of foreign direct investment and deepen understanding of the mechanisms underlying the environmental spillover effects of multinational enterprises.