Environmental Regulations, Competition and Divestment of Foreign Direct Investment: Evidence from China

Abstract This paper is concerned with whether the Chinese increasingly stringent environmental regulations (ER) lead to the divestment of foreign direct investment (FDI). Based on industrial firm-level panel data from 2003 to 2010, our results show that the stricter ER do not induce the divestment of FDI but rather reduce the probability of foreign firms’ withdrawal from China. Moreover, in cities with a higher degree of marketization, the ER have greatly reduced the exit probability of foreign firms. The mechanism analysis shows that due to the scale and technological advantages of foreign companies, the ER have stimulated innovation, increased the market share and profits of foreign companies. However, the ER have a greater negative impact on domestic firms’ performance. This research has theoretical and empirical significance for the economic development and environmental protection of developing countries.