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Time to Say Goodbye? The Impact of Environmental Regulation on Foreign Divestment

Haiou Mao (), Holger Görg () and Guopei Fang ()
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Haiou Mao: Huazhong University
Holger Görg: Kiel Institute for the World Economy
Guopei Fang: Huazhong University

No 16406, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We look at divestments by foreign firms – a topic that has received comparatively little attention in the literature – and investigate how changes in the regulatory environment in the host country may impact on such divestment decisions. We use the implementation of China's Two Control Zone (TCZ) policy as a "quasi-natural experiment", using detailed firm level combined with city level data for the empirical analysis. Our results show that the implementation of TCZ policy has led to higher probabilities of divestments by foreign firms in targeted TCZ cities and industries. The mechanism behind this seems to be a TCZ-induced increase in discharge fees and efforts to reduce SO2 emissions. Allowing for heterogeneity of effects, we find that the effect is particularly strong for firms from source countries with less stringent environmental regulation, and those using less advanced technology. We furthermore show that firms using intermediates from polluting industries also experience a higher probability of divestment.

Keywords: foreign divestment; environmental regulation; Two Control Zone Policy; China (search for similar items in EconPapers)
JEL-codes: F23 Q58 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2023-08
New Economics Papers: this item is included in nep-cna, nep-env, nep-int, nep-reg and nep-res
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Forthcoming - forthcoming in: Canadian Journal of Economics

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