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The impact of environmental regulation on foreign firms’ exit: from the perspective of competition

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Abstract

Most of the existing studies on the pollution haven hypothesis focus on the foreign direct investment (FDI) inflow, ignoring the divestment of FDI and the role of competition. Based on Chinese firm-level data, we investigate the relationship between environmental regulation (ER) and the exit of foreign firms from China. The results indicate that ER does not cause foreign firms to leave China, but rather reduces the probability of foreign firms exiting China. This effect is present in eastern China and the medium-polluting industries. We innovatively explore the underlying mechanisms from the perspective of firm competition and market competition environment. Firm competition mechanism finds that ER promotes foreign firms’ business performance (market share, profits, and productivity) but undermines the domestic firms’ business performance, thus reducing the probability of foreign firms leaving. Furthermore, the market competition environment plays a positive moderating effect. ER has a greater role in reducing the probability of foreign firms’ exit when regions have higher market competition. Our findings offer a basis for the Chinese government to formulate environmental protection policies and provide experience for other developing countries.

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Availability of data and materials

The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.

Funding

This work was supported by the Major Projects of National Social Science Fund of China (Grant No. 71673182).

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Authors and Affiliations

  1. School of Economics, Shanghai University, Shanghai, 200444, China

    Lufeng Tai & Linnan Yan

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  1. Lufeng Tai
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  2. Linnan Yan
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Contributions

Lufeng Tai: conceptualization, formal analysis, methodology, software, writing. Linnan Yan: data collection, review and editing, funding acquisition, investigation, supervision.

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Correspondence to Linnan Yan.

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Tai, ., Yan, L. The impact of environmental regulation on foreign firms’ exit: from the perspective of competition. Environ Sci Pollut Res 29, 15539–15550 (2022). https://doi.org/10.1007/s11356-021-16823-w

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