UNIT 1 ARTICLE REVIEW ( ETHICS )

Environmental Pressure and the Performance of Foreign Firms in an Emerging Economy

Nahyun Kim • Jon J. Moon • Haitao Yin

Received: 23 July 2014 / Accepted: 4 February 2015 / Published online: 14 February 2015

� Springer Science+Business Media Dordrecht 2015

Abstract Does environmental management help foreign

firms outperform local firms in emerging economies? While

existing research suggests that environmental management

may or may not benefit firm performance, the question is

particularly under-investigated in the emerging economy

context. Using the data on foreign investment into China, this

study explores whether foreign firms that are under greater

environmental pressure, at home or at the host, outperform

comparable local firms in an emerging host country. In mak-

ing this comparison, we use propensity-score matching and a

difference-in-differences approach to handle the problem of

endogeneity inherent in comparing the performances of for-

eign versus local firms. We find empirical support that foreign

firms perform better than local firms when they are under high

environmental pressure in the emerging host country, and this

result is driven by the foreign firms originating from countries

with high environmental pressure.

Keywords Environmental pressure � Stakeholder theory � Foreign direct investment � Emerging economy � Firm performance

Introduction

The impact of environmental management on the perfor-

mance of foreign firms is debatable. On the one hand,

studies show that environmental management is beneficial

to foreign firms, helping them become competitive and

gain legitimacy and resulting in a positive firm perfor-

mance (Chang 2011; Hart 1995; King and Lenox 2002;

Porter and van der Linde 1995). On the other hand, it is

argued that environmental management creates additional

costs that might have negative effects on foreign firm

performance (Jaggi and Freedman 1992; Palmer et al.

1995), driving them to seek pollution havens (Cole and

Elliott 2005; Ding et al. 2014; Walter 1982). In this study,

we attempt to examine the effect of environmental man-

agement by foreign firms on their performance in an

emerging economy by comparing the performance of for-

eign-acquired local firms and similar local firms under

different levels of host country environmental pressure and

home country environmental pressure.

Existing studies have shown how the performance of

firms entering a foreign country is determined. On the one

hand, foreign firms receive an advantage from foreign

ownership due to access to proprietary assets such as

technologies, brands, and procedural know-how, which

could enable better performance (Caves 1996; Dunning

1981; Kogut and Zander 1993). On the other hand, foreign

firms have to face liability of foreignness in host countries,

which results in lower performance compared to local firms

(Hymer 1976; Zaheer 1995; Zaheer and Mosakowski

1997). We argue that a capability for environmental man-

agement can be an important component of the foreign-

ownership advantage that has not been highlighted so far.

In addition, environmental management can help foreign

firms reduce the liabilities of foreignness, particularly in

N. Kim

Institute for Business Research & Education, Korea University

Business School, Korea University, 145 Anam-ro, Seongbuk-gu,

Seoul 136-701, Korea

J. J. Moon (&) Korea University Business School, Korea University, 145 Anam-

ro, Seongbuk-gu, Seoul 136-701, Korea

e-mail: [email protected]

H. Yin

Antai College of Economics and Management, Shanghai Jiao

Tong University, 535 Fahua Zhen Road, Shanghai 200052,

China

123

J Bus Ethics (2016) 137:475–490

DOI 10.1007/s10551-015-2568-6

terms of dealing with stakeholder pressures and gaining

legitimacy in the host country.

We use subsidiary-level financial data from China and

compare the performances of foreign-acquired local firms

with those of similar local firms by employing propensity-

score matching and the difference-in-differences (DID)

technique (De Loecker 2007; MacGarvie 2006; Rosenbaum

and Rubin 1983),with subsamples of firms facing different

levels of environmental pressure at the host country, and

among them, with subsamples of foreign firms facing dif-

ferent levels of environmental pressure at the home country.

We argue that China is an ideal place to study the impact of

environmental pressure on foreign firm performance in an

emerging economy for the following reasons: first, China

received the largest amount of foreign direct investment

(FDI) among emerging economies, as of 2009 (UNCTAD

2010). Second, there is substantial heterogeneity in the de-

gree of environmental pressure exerted by the home coun-

tries of foreign investors. The majority of these investments

came from the Greater China regions of Hong Kong, Macau,

and Taiwan, whereas most others came from high-income

countries where environmental standards are much higher

than those in China. Third, environmental pollution is a big

concern in China, and this problem is receiving much at-

tention from other countries as well (Economist 2013; Wong

2013). Finally, there exist substantial variations in the level

of pollution and the degree to which environmental regula-

tions are enforced among different industries in China. These

variations, which lead to varying degrees of environmental

pressure, provide us with a fertile ground to study the

aforementioned impacts.

We use propensity-score matching and the DID method

to address the problem of endogeneity inherent in com-

paring the performance of foreign firms with those of local

firms. When foreign firms consider investing in a local

firm, they are likely to invest in more promising local firms.

Consequently, the performance difference between for-

eign-invested firms and local firms is probably caused ei-

ther by foreign ownership or by the local firm’s

characteristics. We are able to address the effect of ob-

servable firm characteristics on receiving foreign invest-

ment by employing the propensity-score matching in

conjunction with DID approach (Arnold and Javorcik

2009; Chang et al. 2013). We match each foreign-acquired

local firm (treatment group) with a remaining local firm

(control group) that has not been acquired by a foreign

investor, despite having an almost identical ex-ante prob-

ability of being acquired, within the same ownership type,

three-digit SIC industry, province, and year. After ad-

dressing the endogeneity issue with propensity-score

matching, we adopt the DID method to compare the per-

formances of these two groups. Our findings confirm that

the performance of foreign-acquired local firms is better

than that of matched local firms in industries with greater

regulatory scrutiny, while we find no such differences in

industries with less regulatory scrutiny. Moreover, foreign-

acquired local firms, originating from countries with high

environmental pressure, greatly outperform matched local

firms in industries with greater regulatory scrutiny, while

there is no difference between foreign-acquired local firms

originating from countries with low environmental pressure

and matched local firms.

Our study contributes to the literature on environmental

management in business ethics. An increasing number of

multinational firms are finding it challenging to develop

sustainable business strategies to meet the diverse demands

of their stakeholders. Despite the salience of the subject,

researches on environmental management in emerging

economies have been limited to discussions on stakeholder

management or environmental regulations. This is pri-

marily due to the unavailability of disaggregate data. We

are proposing a method that can circumvent this limitation

and highlight the conditions under which foreign investors

can expect to benefit from their superior environmental

management capabilities. We argue that the capabilities of

foreign firms to deal with environmental pressure can add

to the foreign-ownership advantage, augmenting conven-

tional advantages such as technologies, brands, and

reputation. We also argue that the clever handling of en-

vironmental issues can help foreign firms reduce the lia-

bility of foreignness. Our findings suggest that foreign

firms operating in emerging economies can utilize better

environmental management capabilities to address the de-

mands of the host country government, customers, and the

media, which could lead to enhanced competitiveness and

sustainability in the host country.

This paper is organized as follows. In the next section,

we build on the existing literature and develop our hy-

potheses. In the third section, we discuss our data and

methodology. We present our empirical findings in the

fourth section and then conclude the paper with a summary

of findings, and discuss the limitations of the study along

with suggestions for future research.

Theory and Hypotheses

Existing studies in international business propose that

foreign firms have great opportunities to outperform local

firms when they are equipped with valuable firm-specific

assets such as state-of-the-art technologies, advanced

management systems, and a manifold international expe-

rience. Proprietary assets, referred to as the ‘‘ownership’’

advantage, enable foreign firms to expand into new markets

and gain profitability across many different countries

(Caves 1996; Dunning 1981; Kogut and Zander 1993).

476 N. Kim et al.

123

On the other hand, many studies support the opposite

argument that local firms outperform foreign firms. Unlike

local firms, foreign firms lack institutional information on

the economy, law, culture, and language of the host

country, and thereby incur additional costs, known as the

‘‘liability of foreignness’’ (Hennart 1982; Hymer 1976).

Zaheer and Mosakowski (1997) find evidence of liability of

foreignness in global currency trading over two decades

and identify the conditions under which foreignness be-

comes a liability. Mezias (2002) states that British, Ger-

man, and Japanese subsidiaries in the US are not well-

versed in local practices, causing them to face more labor

lawsuit judgments in both federal and state jurisdictions.

One foreign-ownership advantage that has received little

attention is the high standard of environmental management

by foreign firms. Recent literature underscores the importance

of environmental and social legitimacy in every subsidiary

location,andthemanifoldstakeholderpressuresthatinfluence

firms’ environmental management practices (Delmas and

Toffel 2008; Escobar and Vredenburg 2011; Huang and Kung

2010; Walker et al. 2014). Stakeholder theory holds that

corporations should manage the relationship with stakehold-

ers proactively to gain a sustainable competitive advantage

(Bach and Allen 2010; Berrone et al. 2007; Freeman 1992;

Porter and Kramer 2006; Sharma and Vredenburg 1998). As

globalization makes competition more fierce, corporations

find that they cannot maintain their competitive edge by

merely focusing on narrowly defined market strategies (Bach

and Allen 2010). They need to interact with stakeholders, and

even aim at creating shared value between the firm and the

society,toattainandmaintaina competitiveadvantage (Porter

and Kramer 2011). It is also argued that the strengths of for-

eign firms in stakeholder management can be an effective

weapon to overcome the ‘‘liability of foreignness’’ derived

from institutional differences.

Several studies point out that among the various stake-

holders, the natural environment is growing increasingly

pivotal in shaping a firm’s competitiveness. Driscoll and

Starik (2004) describe the natural environment as one of

the important stakeholders based on legitimacy and ur-

gency. Hillman and Keim (2001) argue that the natural

environment is fundamental to several primary stakehold-

ers for environmentally sensitive industries, and managing

environmental concerns proactively can therefore lower the

costs of complying with the existing and future environ-

mental regulations. Firms respond to environmental issues

differently, depending on the level of pressure from

stakeholders (Henriques and Sadorsky 1999; Qi et al. 2013;

Vazquez-Brust et al. 2010) and on how much importance

they attach to environmental concerns in their operations.

Compared to indigenous local firms, foreign firms face

more complicated stakeholder management issues as they

concern themselves with both home country and host country

stakeholders (Buysse and Verbeke 2003; Delmas and Toffel

2008; Rodriguez et al. 2006). It is predicted that stakeholders

in the home country and host country will have different,

sometimes conflicting, interests that require foreign firms to

design sophisticated stakeholder strategies. Further, host

country governments, consumers, and suppliers might dis-

criminate against foreign firms (Hymer 1976), putting foreign

firms under rigorous scrutiny. Additional attention is also

given to foreign firms as host country stakeholders regard

foreign firms differently from local firms and apply different

standardsinevaluatingenvironmental performance (King and

Shaver 2001; Kostova and Zaheer 1999).

Under pressure from various stakeholders, foreign firms

are motivated to develop proactive stakeholder strategies

rather than passively complying with regulations in an at-

tempt to attain competitiveness (Hillman and Keim 2001;

Mitchell et al. 1997). Delmas and Toffel (2008) suggest

that institutional pressures from both market constituents

and nonmarket constituents cause firms to adopt environ-

mental management standards such as International Stan-

dard Organization (ISO) 14001. Reid and Toffel (2009)

argue that firms are more likely to adopt practices consis-

tent with social movements when they are faced with

government regulation on social issues. King and Shaver

(2001) find that additional social demands stimulate for-

eign firms to carry out more waste processing than do-

mestic firms in the US. Firms that draw the attention of

their stakeholders tend to enhance their environmental

practices above home country standard, which helps them

go beyond local standards and obtain social legitimacy.

Foreign firms are also able to establish green firm-specific

advantages in response to heightened pressure for national

responsiveness from stakeholders. These advantages may,

in turn, allow foreign firms to overcome their potentially

weak legitimacy (Rugman and Verbeke 1998).

Pressures from evolving environmental regulations drive

foreign firms to innovate green technologies, allowing them

to accumulate environmental management know-how and

offsetting the costs of compliance with environmental stan-

dards (Berrone et al. 2013; Jaffe et al. 1995; Porter and van

der Linde 1995). This ‘‘innovation offset’’ plays a significant

role in abating pollution and reducing private costs (King and

Lenox 2002; Sánchez-Medina et al. 2015). Benefits from the

innovation offset become greater when foreign firms adopt

advanced environmental practices compared to local firms in

emerging economies, which may adopt underdeveloped

practices or lack them altogether (Rugman and Verbeke

1998). The advanced environmental practices of foreign

firms can help them gain a competitive advantage over local

firms, as foreign firms are able to obtain stronger legitimacy

by applying their environmental management knowledge to

operating practices and making local stakeholders aware of

such practices in the emerging host country.

Environmental Pressure and the Performance of Foreign Firms 477

123

Resources associated with environmental management

capabilities accumulate in firms that have experienced

strict environmental standards in multiple countries

(Dowell et al. 2000), which firms can utilize in adapting to

the demands of stakeholders (Aragon-Correa and Sharma

2003; Russo and Fouts 1997). For instance, firms that have

acquired knowledge of environmental laws and regulations

through exports may have greater abilities to manage their

environmental practices (Darnall et al. 2008; Lin et al.

2014). Luo (2000) shows that the dynamic capabilities of

foreign firms enable them to overcome institutional

uncertainty and to evolve in meeting external and internal

needs. Foreign firms are expected to be able to address the

demands of multiple stakeholders in their environmental

strategy (Sharma and Henriques 2005), and their responses

to environmental pressure across many countries drive the

standardization of their environmental policy on a global

scale (Christmann 2004; Lyon and Maxwell 2004). Envi-

ronmental management capabilities obtained via extensive

international experience may, in turn, reinforce the existing

foreign-ownership advantage and become an integral part

of the foreign-ownership advantage in itself (Eskeland and

Harrison 2003; Zeng and Eastin 2007).

Some authors, however, suggest that proactive envi-

ronmental management requires firms to incur additional

costs, resulting in negative financial consequences (Cor-

deiro and Sarkis 1997; Jaggi and Freedman 1992; Kim and

Statman 2012; Palmer et al. 1995; Walley and Whitehead

1994). Simply complying with low-level environmental

standards may not require foreign firms to invest in envi-

ronmental programs, as foreign firms are already accus-

tomed to higher environmental standards in their home

countries. Adopting environmental practices proactively in

emerging economies, on the other hand, would lower their

expenses, including investments and costs such as the cost

of environmental training and building formal management

systems and procedures (Cole and Elliott 2005).

In this paper, we will detail how advanced environ-

mental management by foreign firms contributes to better

firm performance in an emerging host country despite the

aforementioned costs. First, foreign firms from advanced

economies with high environmental standards are likely to

possess advanced environmental management systems.

Such systems improve resource productivity in a multitude

of ways, for example, by saving redundant raw materials

and recycling of products. This improved productivity may

lead to positive firm performance (Chen et al. 2014; Dan-

gelico and Pujari 2010; Dowell et al. 2000). Second, for-

eign firms can improve their reputation, legitimacy, and

capabilities when they are committed to environmental

management practices (Berrone et al. 2007; Muhammad

et al. 2014). A positive reputation and legitimacy put

foreign firms in a better position to deal with multiple

stakeholders from the host country and the home country.

For instance, the legitimacy may lessen strict governmental

monitoring of not only environmental management prac-

tices, but also other practices such as workplace safety and

product quality. Firms with legitimacy have an advantage

in raising financial capital, as investors may take their

environmental reputation into consideration when they in-

vest (Jo et al. 2014; Klassen and McLaughlin 1996).

Moreover, foreign firms are able to avoid the risks of latent

costs of external uncertainty in the future by educating their

stakeholders about their environmental practices (Cai and

He 2013). Firms which proactively practice corporate so-

cial responsibility (CSR) receive insurance-like protection

against negative events (Godfrey et al. 2009), and such

CSR activities alleviate financial losses during negative

events such as product recalls (Minor and Morgan 2011).

Compared to local firms, foreign firms are less accepted in

the institutions of the host country, making them vulnerable

to unpredictable institutional pressure.

Environmental Pressure from Host Country

Environmental regulation can differ across industries,

thereby leading to heterogeneous environmental pressure

on firms in different industries. Cowen et al. (1987) show

that the industry to which a firm belongs determines its

corporate social disclosure practices. Firms in consumer-

oriented industries have a greater interest in corporate so-

cial disclosure, as they are able to improve their reputation

and profits by projecting a socially responsible image.

Hackston and Milne (1996) also show that listed firms in

New Zealand regard industry type as an indicator of either

real or potential social pressure and adopt social and en-

vironment disclosure practices accordingly. It is also well

known that the degree of pollution and monitoring vary by

industry (Clarkson et al. 2008; Qi et al. 2013).

Firms also face different stakeholder pressures, de-

pending on the industry to which they belong (Zeng et al.

2012), and this may significantly affect their strategies and

behavior. For instance, firms in industries with greater

regulatory scrutiny attract more attention, and thus demand

more pollution-abatement equipment (Greaker 2006).

Since it is commonly believed that foreign firms have su-

perior pollution-abatement knowledge, skills, and princi-

ples, they are more likely to improve their capabilities to

meet higher regulatory stringency in heavily polluting in-

dustries. This leads to our first hypothesis:

Hypothesis 1 Foreign firms are likely to outperform

comparable local firms when they operate in industries

with greater regulatory scrutiny at the host country.

478 N. Kim et al.

123

Environmental Pressure from Home Country

Stakeholders in the host country apply different standards

and put varying levels of pressure on foreign firms, based

on their country of origin (Spencer and Gomez 2011).

Foreign firms coming from countries with high standards

are expected to build good reputation and commit to re-

sponsible behavior by stakeholders both at home and at the

host. Confronting extra monitoring and scrutiny, such

foreign firms should pay closer attention to their institu-

tional environment, since the loss of legitimacy in one

country can spill over into other countries (Kostova and

Zaheer 1999; Spencer and Gomez 2011).

Given that host country stakeholders pay a different

level of attention to a foreign firm’s environmental practice

based on its country of origin, foreign firms originating

from countries with high environmental pressure have

greater incentives to take an initiative in proactive envi-

ronmental management. Compared to foreign firms coming

from countries with low environmental pressure, these

firms are more likely to be equipped with strong organi-

zational capabilities and internal resources to address en-

vironmental issues, enabling them to satisfy external

stakeholder expectations for firms’ environmental respon-

sibilities (Berrone et al. 2013; Rugman and Verbeke 1998).

Moreover, foreign firms that willingly comply with envi-

ronmental regulations can encourage employees’ involve-

ment reinforcing firms’ environmental product and process

improvement (Chen et al. 2014). Therefore, foreign firms

with superior environmental management systems can be

viewed as possessing latent abilities that can ease high

environmental pressure and develop a sustainable com-

petitive advantage over local firms in the host country,

achieving superior performance (Porter and van der Linde

1995). This line of logic leads to our second hypothesis:

Hypothesis 2 Foreign firms originating from countries

with high environmental pressure are likely to outperform

comparable local firms when they operate in industries

with greater regulatory scrutiny at the host country.

Methods

Data and Sample

We utilize the Annual Industrial Survey Database

(1998–2009) of the National Bureau of Statistics of China

(NBSC) to gather firm-level financial and demographic

indicators. This database contains extensive information on

both local and foreign manufacturing firms in China

(Chang and Xu 2008; Gao et al. 2009). The NBSC collects

financial information on firms, aggregates it, and then

publishes the aggregated information in the official China

Statistics Yearbooks. In 1998, NBSC expanded its data

coverage beyond state-owned enterprises to include foreign

firms with annual sales of at least RMB5 million (ap-

proximately, USD 732,000 using the average exchange rate

in 2009) in the year prior to the survey. We also utilized

regional demographic information such as population, re-

gional gross domestic product (GDP), and infrastructure.

When foreign firms enter China, they either establish a

new subsidiary or invest in the existing local firms. In this

study, we concentrate only on instances of the latter to

separate the issue of entry mode from post-entry perfor-

mances. Chinese law defines foreign firms as firms in

which the foreign partner possesses at least 25 % of the

registered capital for equity investment. The country of

origin data for foreign investors are from the Survey of

Foreign-Invested Enterprises conducted by NBSC, and the

home country environmental pressure data are from the

survey of ISO 14001 certification.

We restrict our sample to firms for which we have at

least five consecutive years of observations, from year t -

2 through year t ? 2, where the foreign acquisition of a

local firm takes place in the year t. We track performance

changes from year t - 2 through year t ? 2. Among the

140,412 local firms that we track for at least five con-

secutive years, 1023 local firms received foreign invest-

ment. As we require data for up to 2 years prior to and

2 years after the investment, the foreign-acquired firms in

our sample received the investment between 2000 and

2007. We match each of these firms with the most similar

local firm that did not receive foreign investment, within

the same ownership type, three-digit SIC industry, pro-

vince, and year.

Variables

In this paper, we use return on assets (ROAs) as a measure

of firm performance, defined as net income divided by total

assets. ROA is the most commonly used measure of prof-

itability (Hart and Ahuja 1996; King and Lenox 2002;

Russo and Fouts 1997).

We measure the following province-level indicators to

include the determinants of foreign acquisition. Province

size is measured by population. Province income is defined

as regional GDP per capita. Infrastructure is measured by

road density in each province, which is defined as high-

ways (km) divided by land area (km 2 ), as proposed by

Dean et al. (2009).

We include multiple firm characteristics in an attempt to

explain the foreign acquisition decision. To control for

size-related factors leading to acquisition, we measure firm

size using the logarithm of total assets. Fixed assets ratio is

measured by dividing the book value of fixed assets by that

Environmental Pressure and the Performance of Foreign Firms 479

123

of total assets, to indicate the local firm’s capital intensity.

Intangible assets ratio is measured by dividing the book

value of intangible assets by that of total assets, to reflect

the relative importance of the local firm’s intangible assets.

Export ratio is defined as export sales divided by total

sales, reflecting the firm’s export orientation. Firm age is

defined as the number of calendar years since the local firm

was established. We include firm age to control for the

maturity of local firms. We define leverage as total debt

divided by total assets to estimate the firm’s financial sta-

bility. We measure the ownership structure of local firms in

terms of the ownership share held by the state, collectives,

corporations, and individuals. State owned and collective

local firms are less attractive to foreign firms, as they have

weak internal management systems and are more closely

monitored and regulated by government. Year dummies

and industry dummies are also included.

To investigate how different levels of environmental

pressure affect the performance of foreign-acquired local

firms vis-à-vis the remaining local firms, we conduct em-

pirical analysis on subsamples. We categorize industries

into two segments: industries with greater regulatory

scrutiny, and industries with less regulatory scrutiny. Na-

tional Environmental Protection Agency issued executive

orders 2003:101 and 2007:105, under which they required

firms in selected ‘‘environmentally sensitive industries’’ to

publish their environmental records for the year when they

applied for listing or refinancing in the stock market (Zeng

et al. 2012). Environmentally sensitive industries are

broadly categorized as follows: food and drink; textile,

clothing, and fur; paper and printing; petroleum, chemistry,

and plastic; metal and nonmetal mining; and medicine and

biological products. To be as precisely as possible, we

based our categorization using a four-digit SIC provided by

the executive orders of 2008:373.

The Industrial Survey Database provides whether for-

eign ownership comes from the Greater China region

(Hong Kong, Macau, and Taiwan) or elsewhere. In terms

of country of origin, Hong Kong is the leading investment

origin with 45.6 % of all foreign invested firms in our data,

followed by Taiwan (12.1 %), Japan (10.9 %), the US

(7.9 %), Korea (4.2 %), Singapore (3.27 %), Germany

(1.57 %), the UK (1.72 %), Macau (1.2 %), and Australia

(0.91 %). These top 10 origins account for 90.1 % of all

foreign firms in our dataset. Based on the fraction of ISO

14001-certified firms over total number of firms in a given

country, we classify that foreign investment from Greater

China region as home countries with low environmental

pressure, and other countries as home countries with high

environmental pressure.

Since foreign firms are only able to make their invest-

ment decision on the basis of financial reports from the

previous year, we lagged all firm-level characteristics from

the year before investment. To deal with outliers, we

deleted observations with extreme performance values:

firms with ROAs greater than 100 % or less than -50 %,

firms with accumulated ROA differences beyond 25 %,

and firms with sales growth in the top 1 % and bottom 1 %.

We winsorize 1 % of observations at both tails to address

outliers for ratio variables. Table 1 provides the descriptive

statistics and pairwise correlations for the variables used in

our analysis.

Propensity-Score Matching Coupled with DID

The endogeneity problem in foreign investment decisions

makes it difficult to compare the performance of firms with

different strategic choices (Shaver 1998). The effect of

foreign ownership on performance cannot be studied by

merely comparing the performance of local and foreign

firms, because foreign parents may prefer to invest in more

promising local firms. This makes it difficult to determine

whether the firm’s performance is due to its inherent

characteristics or due to its foreign ownership. Thus, it is

critical to construct more reliable comparison groups be-

tween local firms and foreign firms. The propensity-score

matching approach allows us to address this endogeneity

issue (Arnold and Javorcik 2009; Heckman et al. 1997;

Rosenbaum and Rubin 1983).

In addition to endogeneity, propensity-score matching

and the DID method help us address limited data avail-

ability with respect to environmental performance. We

attempt to investigate the effect of environmental man-

agement on firm performance by utilizing a linkage be-

tween environmental pressure and environmental

management practice based on previous research. Envi-

ronmental pressure from various stakeholders is likely to

cause firms to engage more proactively in environmental

practices when they have both the motivation and the ca-

pability to do so (Berrone et al. 2013). Anecdotal evidence

from emerging economies, including China, also suggests

that such practices result in better environmental perfor-

mance. Further, many studies have argued for, and

demonstrated, a positive link between environmental per-

formance and firm performance (King and Lenox 2002;

Russo and Fouts 1997). However, due to the intrinsic

sensitivity of such data, we could not obtain information on

firm-level environmental practices or performance data at

national scale. Therefore, by showing the linkage between

environmental pressure and firm performance, we design

our empirical model to find the effects of environmental

management on firm performance without requiring firm-

level environmental data.

In propensity-score matching, the treatment and control

groups are constructed on the basis of scalar ‘‘similarity,’’

calculated from various observable firm characteristics

480 N. Kim et al.

123

T a b le

1 S u m m a ry

st a ti st ic s a n d c o rr e la ti o n s

V a ri a b le s

M S D

1 2

3 4

5 6

7 8

9 1 0

1 1

1 2

1 3

1 4

1 F o re ig n a c q u is it io n (t , % )

0 .4 8 8

6 .9 7 2

1 .0 0 0

2 P ro v in c e si z e (t )

5 7 1 5 .0 6 4

2 4 9 7 .6 2 6

0 .0 2 3 *

1 .0 0 0

3 P ro v in c e in c o m e le v e l (t )

2 .0 9 4

1 .2 5 4

0 .0 0 5 *

- 0 .2 7 4 *

1 .0 0 0

4 In fr a st ru c tu re

(t )

0 .6 8 0

0 .3 6 3

0 .0 0 5 *

0 .0 1 7 *

0 .7 8 3 *

1 .0 0 0

5 R O A

(t – 2 , % )

4 .7 0 7

9 .4 7 6

0 .0 0 4 *

0 .0 4 1 *

0 .1 2 5 *

0 .1 3 7 *

1 .0 0 0

6 R O A

(t – 1 , % )

4 .6 8 3

8 .4 9 7

0 .0 0 7 *

0 .0 9 0 *

0 .1 1 2 *

0 .1 6 1 *

0 .6 6 3 *

1 .0 0 0

7 F ir m

si z e (t -

1 )

9 .8 6 9

1 .3 6 8

0 .0 3 5 *

- 0 .0 1 5 *

- 0 .0 7 4 *

- 0 .0 7 6 *

- 0 .1 0 9 *

- 0 .1 3 4 *

1 .0 0 0

8 F ix e d a ss e ts

ra ti o (t – 1 ,

% )

3 5 .1 5 2

2 0 .0 1 3

- 0 .0 0 5 *

0 .0 4 3 *

- 0 .1 9 4 *

- 0 .1 3 5 *

- 0 .0 5 0 *

- 0 .0 2 0 *

0 .0 6 7 *

1 .0 0 0

9 In ta n g ib le

a ss e ts

ra ti o

(t – 1 , % )

2 .8 3 3

6 .8 3 1

- 0 .0 0 2

0 .0 1 9 *

- 0 .0 2 5 *

- 0 .0 3 0 *

- 0 .0 7 6 *

- 0 .0 8 4 *

0 .1 3 6 *

- 0 .0 6 6 *

1 .0 0 0

1 0

E x p o rt ra ti o (t – 1 , % )

1 2 .2 3 1

2 8 .6 9 8

0 .0 4 9 *

0 .0 0 0

0 .0 9 9 *

0 .0 3 6 *

0 .0 3 1 *

0 .0 2 3 *

- 0 .0 5 4 *

- 0 .0 6 5 *

0 .0 1 7 *

1 .0 0 0

1 1

F ir m

a g e (t -

1 )

1 2 .9 0 7

1 2 .8 2 8

- 0 .0 2 0 *

- 0 .0 4 0 *

- 0 .1 9 0 *

- 0 .1 7 2 *

- 0 .1 7 1 *

- 0 .1 8 4 *

0 .2 4 6 *

0 .0 5 8 *

0 .0 2 1 *

- 0 .0 6 8 *

1 .0 0 0

1 2

L e v e ra g e (t – 1 , % )

6 2 .8 9 5

2 5 .9 2 3

- 0 .0 1 2 *

0 .0 3 7 *

- 0 .0 5 8 *

- 0 .0 5 2 *

- 0 .3 1 4 *

- 0 .3 3 1 *

0 .0 4 0 *

- 0 .1 1 6 *

- 0 .0 2 2 *

0 .0 2 3 *

0 .1 3 1 *

1 .0 0 0

1 3

C o ll e c ti v e fi rm

(t -

1 )

0 .2 0 6

0 .4 0 4

0 .0 0 1

- 0 .0 0 5 *

- 0 .1 1 9 *

- 0 .1 1 9 *

0 .0 4 7 *

0 .0 4 1 *

- 0 .0 8 8 *

- 0 .0 5 7 *

- 0 .0 8 9 *

- 0 .0 2 6 *

0 .0 8 5 *

0 .0 0 6 *

1 .0 0 0

1 4

P ri v a te

fi rm

(t -

1 )

0 .4 2 3

0 .4 9 4

0 .0 0 2

0 .0 7 5 *

0 .2 6 5 *

0 .2 6 4 *

0 .1 1 6 *

0 .1 3 4 *

- 0 .2 3 4 *

- 0 .0 2 7 *

0 .0 0 7 *

0 .1 1 1 *

- 0 .3 6 1 *

- 0 .0 5 5 *

- 0 .4 3 5 *

1 .0 0 0

1 5

In c o rp o ra te d fi rm

(t -

1 )

0 .2 3 6

0 .4 2 4

0 .0 0 9 *

0 .0 0 5 *

- 0 .0 2 9 *

- 0 .0 3 0 *

- 0 .0 2 6 *

- 0 .0 3 0 *

0 .2 7 2 *

- 0 .0 0 9 *

0 .1 1 7 *

- 0 .0 3 3 *

- 0 .0 1 3 *

- 0 .0 3 3 *

- 0 .2 8 2 *

- 0 .4 7 5 *

N =

3 9 5 ,3 6 1

* C o rr e la ti o n c o e ffi c ie n t is st a ti st ic a ll y si g n ifi c a n t a t th e 5 %

le v e l

Environmental Pressure and the Performance of Foreign Firms 481

123

(Heckman et al. 1997; Rosenbaum and Rubin 1983). In this

study, the treatment group is composed of local firms that

received foreign investment, while the control group is

composed of local firms that did not. Because the matched

firms from the treatment and control groups have similar

ex-ante likelihood of receiving foreign investment, we can

attribute the performance difference between foreign-

acquired local firms and matched local firms to foreign

ownership.

In a probit model explaining foreign acquisition deci-

sion, we consider a vector of observable firm characteris-

tics: profitability, firm size, firm age, leverage, export ratio,

intangible and fixed assets ratios, local firm types, province

size, province income level, and infrastructure. We also

Table 2 Probit regression results fora foreign investor’s decision to acquire a local firm

Dependent variable (1) (2) (3) (4) (5)

Foreign acquisition All firms Industries with greater

regulatory scrutiny

Industries with less

regulatory scrutiny

Origins with high

environmental

pressure

Origins with low

environmental

pressure

Province size (t) 6.6 9 10 -5 ** 5.3 9 10

-5 ** 7.1 9 10

-5 ** 4.4 9 10

-5 ** 5.8 9 10

-5 **

(0.000) (0.000) (0.000) (0.000) (0.000)

Province income level (t) 0.088** 0.108** 0.084** 0.077* 0.129**

(0.016) (0.028) (0.019) (0.038) (0.038)

Infrastructure (t) -0.032 -0.063 -0.024 -0.087 -0.022

(0.053) (0.094) (0.064) (0.123) (0.129)

ROA (t – 2) -0.005** -0.002 -0.005** -0.003 -0.002

(0.001) (0.002) (0.002) (0.003) (0.003)

ROA (t - 1) 0.003* 0.004 0.003* 0.004 0.003

(0.001) (0.003) (0.002) (0.004) (0.003)

Firm size (t - 1) 0.177** 0.177** 0.179** 0.199** 0.133**

(0.007) (0.012) (0.008) (0.015) (0.015)

Fixed assets ratio (t - 1) -0.001 -0.001 -0.001 -0.000 -0.000

(0.000) (0.001) (0.001) (0.001) (0.001)

Intangible assets ratio (t - 1) -0.006** -0.002 -0.007** 0.002 -0.006 �

(0.001) (0.002) (0.002) (0.003) (0.003)

Export ratio (t - 1) 0.005** 0.006** 0.005** 0.006** 0.005**

(0.000) (0.001) (0.000) (0.001) (0.001)

Firm age (t - 1) -0.013** -0.012** -0.014** -0.012** -0.011**

(0.001) (0.002) (0.001) (0.002) (0.002)

Leverage (t - 1) -0.002** -0.000 -0.003** -0.000 0.000

(0.000) (0.001) (0.000) (0.001) (0.001)

Collective firm (t - 1) 0.247** 0.238** 0.253** 0.250** 0.188*

(0.039) (0.070) (0.047) (0.096) (0.092)

Private firm (t - 1) 0.210** 0.225** 0.207** 0.200** 0.211*

(0.039) (0.072) (0.047) (0.098) (0.094)

Incorporated firm (t - 1) 0.170** 0.154* 0.178** 0.125 0.151 �

(0.038) (0.068) (0.046) (0.091) (0.091)

Constant -5.259** -5.314** -5.241** -5.379** -5.060**

(0.161) (0.237) (0.175) (0.281) (0.289)

Industry FE Included Included Included Included Included

Year FE Included Included Included Included Included

Pseudo-R 2

0.112 0.102 0.117 0.115 0.092

v2 2745 696.6 2057 416.8 360

(d.f.) 170 68 125 62 63

Observations 395,361 135,042 260,244 129,281 127,890

Standard errors in parentheses � , *, ** Statistical significance at the 10, 5, and 1 % levels, respectively

482 N. Kim et al.

123

consider industry and year fixed effects. With the propen-

sity-score calculated from the probit model, we match

foreign-acquired local firms with remaining local firms

within the same ownership type, three-digit SIC industry,

province, and year. It is essential to assess how well the

propensity-score matching procedure is generated from the

probit model (Dehejia and Wahba 2002; Smith and Todd

2005). We perform balancing tests to ensure that firms in

the treatment and control groups are not statistically dif-

ferent from each other prior to the treatment (please see the

‘‘Appendix’’ section for balancing test results).

We use the DID method to compare the performance of

foreign-acquired local firms with the remaining local firms

in order to remove the effect of unobservable nonrandom

elements, which can affect the performance of both groups.

First, we compute differences in ROA from year t - 1 for

each firm. Then, we compare the difference between the

treatment group and the control group.

Results

Table 2 displays our probit regression results for the for-

eign acquisition decision on local firms. The first column

reports coefficient estimates from the regression using the

entire sample. The second and third columns report coef-

ficient estimates from subsamples in industries with greater

regulatory scrutiny, and industries with less regulatory

scrutiny. The fourth and fifth columns report coefficient

estimates from subsamples of high environmental pressure

origin and low environmental pressure origin, among in-

dustries with greater regulatory scrutiny. All probit re-

gression results show a consistent pattern despite being

calculated with different samples.

As shown by Table 2, province size is positively corre-

lated with foreign acquisition, which implies that foreign

acquisition is more likely in larger provinces in China.

Province income has a positive correlation with foreign

acquisition, as high-income provinces tend to have advanced

economic institutions that provide foreign firms with fa-

vorable business environments. Infrastructure is not sig-

nificantly associated with the acquisition decision after

controlling for the effect of province size and income levels.

However, the coefficient is negatively correlated with for-

eign acquisition in industries with less regulatory scrutiny.

Among the characteristics of local firms, higher ROAs in

the previous year tend to increase the likelihood of acqui-

sition by foreign investors. This is attributable to the fact that

foreign investors tend to seek local firms with sound prof-

itability. On the other hand, ROA 2 years ago is negatively

associated with foreign acquisition. This implies that foreign

investors prefer to invest in local firms with increasing

profitability, since we have already controlled for ROA in

year t - 1. Larger local firms are more likely to be acquired,

suggesting that foreign parents prefer local firms with scale

economies. Fixed assets ratio is not significant. Intangible

assets ratio is negatively associated with the likelihood of

foreign acquisition, because local firms with sufficient in-

tangible assets tend to be independent. Export ratio is

positively associated with the likelihood of foreign acqui-

sition, as foreign investors prefer local firms that have access

to the global market. Firm age is negatively correlated with

the acquisition decision, as foreign parents may prefer firms

with fewer legacies, so that they can be restructured and

integrated smoothly. Leverage is mostly negatively associ-

ated with the investment decision, indicating that foreign

parents try to avoid incurring additional liabilities. Among

local firm types, collective, private, and incorporated local

firms are more likely to be acquired, meaning that these

types of local ownership are favored over state-owned firms

by foreign investors.

Table 3 shows the results from the DID estimation of

foreign-acquired local firms and remaining local firms,

with the matching condition of propensity-score radius

being 0.001 within the same ownership type, the three-digit

SIC industry, the same province, and the same year. This

procedure creates 1023 matches between foreign-acquired

local firms and remaining local firms.

The average treatment effect on the treated (ATT)

measures the difference in cumulative changes in ROAs

between the two groups since the year before the invest-

ment (year t - 1). The results show that in the entire

sample, 1 year after acquisition, foreign-acquired local

firms experience an average increase in ROA of 0.670

percentage point over matched firms that remain local. This

estimate is significant at the 5 % level. The difference

2 years after acquisition is 0.677 percentage point, which is

also significant at the 5 % level.

Table 3 also displays performance differences between

foreign-acquired local firms and the remaining local firms

for subsamples with different levels of environmental

pressure. For the subsample of industries with greater

regulatory scrutiny, the increase in ROA for foreign-ac-

quired local firms is greater than that of the remaining local

firms by 1.370 percentage points in the first year after ac-

quisition and by 2.029 percentage points in the second year

after acquisition. These ATT values are significant at 5 and

1 % levels, respectively. For the subsample of industries

with less regulatory scrutiny, differences in ROAs are not

significant at all. These results supports hypothesis 1 that

foreign firms are likely to outperform comparable local

firms when they operate in industries with greater regula-

tory scrutiny at the host country.

Regarding the environmental pressure originating from

the home country, when foreign firms from high environ-

mental pressure countries target local firms in industries with

Environmental Pressure and the Performance of Foreign Firms 483

123

T a b le

3 P e rf o rm

a n c e s o f fo re ig n -a c q u ir e d fi rm

s v e rs u s re m a in in g lo c a l fi rm

s

R O A

(% ) o v e r ti m e

W h o le

sa m p le

In d u st ri e s w it h g re a te r re g u la to ry

sc ru ti n y

In d u st ri e s w it h le ss

re g u la to ry

sc ru ti n y

Y e a r

t – 2

t -

1 t

t ?

1 t ?

2 Y e a r

t – 2

t -

1 t

t ?

1 t ?

2 Y e a r

t – 2

t -

1 t

t ?

1 t ?

2

T re a te d

5 .4 2 6

5 .4 8 3

5 .7 3 7

6 .3 9 7

6 .1 8 7

T re a te d

4 .6 1 2

5 .0 9 5

5 .4 4 2

6 .5 1 8

6 .6 7 4

T re a te d

5 .5 2 8

5 .5 0 6

5 .7 8 9

6 .1 2 1

5 .7 2 2

C o n tr o ls

5 .1 7 0

5 .3 3 3

5 .1 6 0

5 .5 7 8

5 .3 6 0

C o n tr o ls

5 .4 5 4

5 .5 3 9

5 .0 0 5

5 .5 9 2

5 .0 8 9

C o n tr o ls

5 .3 1 2

5 .3 8 7

5 .5 7 7

5 .6 2 6

5 .2 3 5

A T T

0 .4 2 8

0 .6 7 0 *

0 .6 7 7 *

A T T

0 .8 8 2

1 .3 7 0 *

2 .0 2 9 * *

A T T

0 .0 9 3

0 .3 7 6

0 .3 6 8

S E

0 .2 7 1

0 .3 1 9

0 .3 3 5

S E

0 .5 4 0

0 .6 2 5

0 .6 6 8

S E

0 .3 2 5

0 .3 6 6

0 .3 8 2

N 1 0 2 3

1 0 2 3

1 0 2 3

1 0 2 3

1 0 2 3

N 2 9 2

2 9 2

2 9 2

2 9 2

2 9 2

N 7 1 9

7 1 9

7 1 9

7 1 9

7 1 9

A m o n g th e in d u st ri e s w it h g re a te r re g u la to ry

sc ru ti n y

O ri g in s w it h h ig h e n v ir o n m e n ta l p re ss u re

O ri g in s w it h lo w

e n v ir o n m e n ta l p re ss u re

Y e a r

t – 2

t -

1 t

t ?

1 t ?

2 Y e a r

t – 2

t -

1 t

t ?

1 t ?

2

T re a te d

4 .2 1 3

4 .6 2 6

4 .8 9 6

6 .8 6 1

6 .2 9 8

T re a te d

5 .2 9 4

5 .9 6 1

6 .2 5 4

6 .8 3 5

7 .1 1 8

C o n tr o ls

3 .3 4 9

4 .5 1 1

4 .1 4 0

4 .0 6 3

3 .8 8 5

C o n tr o ls

5 .2 3 1

4 .6 3 1

4 .4 4 9

5 .2 8 7

4 .7 6 5

A T T

0 .6 3 6

2 .6 7 8 * *

2 .2 9 4 * *

A T T

0 .4 7 5

0 .2 2 8

1 .0 2 3

S E

0 .7 8 6

0 .8 2 6

0 .8 8 7

S E

0 .6 3 6

0 .7 9 2

0 .8 0 9

N 1 4 1

1 4 1

1 4 1

1 4 1

1 4 1

N 1 9 3

1 9 3

1 9 3

1 9 3

1 9 3

� , * , * * S ta ti st ic a l si g n ifi c a n c e a t th e 1 0 , 5 , a n d 1 %

le v e ls , re sp e c ti v e ly

484 N. Kim et al.

123

greater regulatory scrutiny, the increases in ROAs for for-

eign-acquired local firms are greater than those for remaining

local firms by 2.678 percentage points in the first year after

acquisition and 2.294 percentage points in the second year

after acquisition. Both of these ATT values are significant at

the 1 % level. When foreign firms from low environmental

pressure origins target local firms in industries with greater

regulatory scrutiny, differences in ROA increases are not

statistically significant at all. These results supports hy-

pothesis 2 that foreign firms originating from countries with

high environmental pressure are likely to outperform com-

parable local firms when they operate in industries with

greater regulatory scrutiny at the host country (Figs. 1, 2).

Discussion and Conclusion

As stakeholder management becomes more important for

multinational firms (Bouquet and Deutsch 2008; Buysse

and Verbeke 2003; Rodriguez et al. 2006), firms seek en-

vironmental knowledge and practices to gain legitimacy

(King and Lenox 2002). In this study, we evaluate the

effect of environmental pressure from the host country on

the firm performance of foreign firms, with an empirical

analysis of foreign-acquired firms vis-à-vis local firms in

China. We believe that environmental capability is an

important, yet under-emphasized part of the foreign-own-

ership advantage as well as a means to mitigate the

3.5

4

4.5

5

5.5

6

6.5

7

7.5

Foreign acquired firms Local firms

3.5

4

4.5

5

5.5

6

6.5

7

7.5

Foreign acquired firms Local firms

Industries with greater regulatory scrutiny Industries with less regulatory scrutiny

Fig. 1 Performance difference between foreign-acquired firms and local firms by industry, adjusted for difference-in-differences in year t - 1

3.5

4

4.5

5

5.5

6

6.5

7

7.5

Foreign acquired firms Local firms

3.5

4

4.5

5

5.5

6

6.5

7

7.5

Foreign acquired firms Local firms

Countries with high environmental pressure Countries with low environmental pressure

Fig. 2 Performance difference between foreign-acquired firms and local firms by home country environmental pressure in industries with greater regulatory scrutiny, adjusted for difference-in-differences in year t - 1

Environmental Pressure and the Performance of Foreign Firms 485

123

liabilities of foreignness. To avoid the endogeneity prob-

lem in comparing the performances of foreign-acquired

and local firms, we use propensity-score matching in con-

junction with the DID approach. We identify a substantial

increase in the performance of foreign-acquired local firms

compared to the remaining local firms in industries with

greater regulatory scrutiny. On the whole, this empirical

result provides evidence that environmental management

capabilities can be a valuable asset in enhancing the per-

formance of foreign firms in an emerging economy. We

also find that this increase in performance of foreign-ac-

quired local firms over local firms in industries with greater

regulatory scrutiny is due to the acquirers from countries

with high environmental pressure. This finding suggests

that foreign firms, accustomed to complying with high

environmental standards at home, can leverage their envi-

ronmental capabilities in differentiating themselves from

local competitors in a circumstance with high environ-

mental pressure at the host.

This study contributes to the environmental management

literature by proposing a link between environmental man-

agement and firm performance. Since firm-level environ-

mental data are not available on a national scale, we designed

our research using a recently developed empirical method

and addressed our research question indirectly. In doing so,

we were able to confirm that foreign-acquired firms, espe-

cially those facing higher environmental pressure at the host

country, might be able to turn their strengths in environ-

mental management into superior performance. This ad-

vantage seems particularly significant when the foreign firm

is accustomed to face high level of environmental pressure at

home. We expect that these findings will highlight the ben-

efits of proactive environmental management for foreign

firms operating in emerging economies.

Among managerial and policy implications, our study

suggests that foreign firms should take a keen interest in the

natural environment of their host country and invest in green

technologies to gain competitiveness, as pollution abatement

helps to lower the liability of foreignness. Hart (1995) and

Porter and van der Linde (1995) propose that foreign firms

should develop an environmental management strategy, in

addition to a conventional corporate strategy, to gain a

competitive advantage. In emerging economies, where en-

vironmental issues are growing increasingly important,

foreign firms with environment-friendly reputations are

likely to be welcomed by stakeholders and will have more

opportunities to gain a favorable position. Therefore, man-

agers in foreign firms need to understand that bringing in

environmental management systems and knowledge will

benefit them more than merely seeking pollution havens.

This study also has meaningful implications for public

policy. In emerging economies, environmental policy makers

often cast doubt on the environmental impact of foreign

investment,basedonthepollutionhavenhypothesis(Coleand

Elliott 2005; Walter 1982). However, as long as the govern-

ment is intent on economic development, policymakers might

as well take decisions that attract foreign firms with superior

environmental capabilities, while strictly enforcing environ-

mental regulations. In doing so, the government can improve

the environmental conditions compared to the situation if they

attempt to pursue economic development by relying solely on

domestic firms. Further, it is possible that the advanced en-

vironmental technologies of foreign firms will spill over to

other domestic firms that are facing similar environmental

pressures, as they would want to catch up with foreign firms.

The existence of such spillover effects from foreign firms to

local firms could be an interesting topic for future research.

We would like to acknowledge a few limitations of the

current study, which we hope to address in the future. First,

although we examine whether foreign firms perform better

than local firms under greater environmental pressure, our

research design does not allow us to include foreign firms

that enter through greenfield investments. In comparing

foreign firms and local firms, we only consider foreign firms

acquiring an existing local firm. In order to circumvent the

endogeneity problem, we needed a treatment, and that ne-

cessity limited our sample size in a sense. Second, as our

study uses aggregate environmental data due to the limitation

on data availability, we cannot observe the firm-level envi-

ronmental practices and environmental performances di-

rectly. We encourage future researchers to collect firm-level

environmental data and identify the environmental man-

agement practices of firms to investigate mechanisms that

can enhance firm performance in a more direct way. Finally,

since we do not know the identity of the foreign investor, we

need to approximate the quality of environmental manage-

ment by the foreign investor by the country-level environ-

mental pressure. The availability of sustainability reports by

many multinational firms should enable future researchers to

gather enough information on firm-level environmental

performance data for firms undertaking FDI. Matching firm-

level environmental performance data of the foreign investor

with firm-level environmental performance data of the local

target company can further enhance our understanding of

environmental impact of FDI in the future.

Acknowledgments Jon J. Moon acknowledges that this work was supported by the National Research Foundation of Korea Grant

funded by the Korean Government (NRF-2013S1A5A8023591).

Haitao Yin wishes to thank the financial supports from the National

Natural Science Foundation of China (No. 71202071, 71322305 and

71421002).

Appendix: Results for Balancing Tests

See Tables 4, 5, 6, 7 and 8.

486 N. Kim et al.

123

Table 4 Balancing test results (whole sample)

Variables t-Test on the mean of each variable

Treatment Control t-stat p-value

ROA (t – 2, %) 5.426 5.170 0.650 0.514

ROA (t – 1, %) 5.483 5.333 0.420 0.677

Firm size (t - 1) 10.137 10.052 1.540 0.124

Fixed assets ratio (t – 1, %) 33.807 33.042 0.880 0.378

Intangible assets ratio (t – 1, %) 2.831 2.652 0.630 0.526

Export ratio (t – 1, %) 23.581 24.211 -0.380 0.705

Firm age (t - 1) 10.029 9.601 0.980 0.326

Leverage (t – 1, %) 60.394 59.663 0.680 0.497

N 1023 1023

Hotelling test T 2

F-stat p [ F N

5.071 0.632 0.752 2046

Table 5 Balancing test results (industries with greater

regulatory scrutiny)

Variables t-Test on the mean of each variable

Treatment Control t-stat p-value

ROA (t – 2, %) 4.612 5.454 -1.160 0.248

ROA (t – 1, %) 5.095 5.539 -0.570 0.566

Firm size (t - 1) 10.495 10.376 1.110 0.268

Fixed assets ratio (t – 1, %) 37.218 36.417 0.520 0.604

Intangible assets ratio (t – 1, %) 3.079 3.415 -0.570 0.571

Export ratio (t – 1, %) 12.013 12.179 -0.080 0.939

Firm age (t - 1) 10.281 8.973 1.570 0.116

Leverage (t – 1, %) 61.862 62.933 -0.540 0.588

N 292 292

Hotelling test T 2

F-stat p [ F N

6.112 0.755 0.643 584

Table 6 Balancing test results (industries with less regulatory

scrutiny)

Variables t-Test on the mean of each variable

Treatment Control t-stat p-value

ROA (t – 2, %) 5.528 5.312 0.460 0.644

ROA (t – 1, %) 5.506 5.387 0.290 0.768

Firm size (t - 1) 9.986 9.935 0.780 0.434

Fixed assets ratio (t – 1, %) 31.428 31.108 0.320 0.752

Intangible assets ratio (t – 1, %) 2.700 2.192 1.760 0.078

Export ratio (t – 1, %) 27.763 27.470 0.140 0.889

Firm age (t - 1) 9.689 9.369 0.630 0.526

Leverage (t – 1, %) 60.075 59.709 0.290 0.773

N 719 719

Hotelling test T 2

F-stat p [ F N

4.446 0.553 0.817 1438

Environmental Pressure and the Performance of Foreign Firms 487

123

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Table 8 Balancing test results (countries with low

environmental pressure)

Variables t-Test on the mean of each variable

Treatment Control t-stat p-value

ROA (t – 2, %) 5.294 5.231 0.07 0.945

ROA (t – 1, %) 5.961 4.631 1.46 0.146

Firm size (t - 1) 10.524 10.443 0.57 0.571

Fixed assets ratio (t – 1, %) 36.532 36.106 0.22 0.825

Intangible assets ratio (t – 1, %) 2.597 2.989 -0.57 0.569

Export ratio (t – 1, %) 13.894 14.124 -0.08 0.937

Firm age (t - 1) 10.342 9.731 0.59 0.556

Leverage (t – 1, %) 62.534 62.123 0.160 0.875

N 193 193

Hotelling test T 2

F-stat p [ F N

4.289 0.526 0.827 386

Table 7 Balancing test results (countries with high

environmental pressure)

Variables t-Test on the mean of each variable

Treatment Control t-stat p-value

ROA (t – 2, %) 4.2133 3.349 0.94 0.346

ROA (t – 1, %) 4.6264 4.511 0.12 0.906

Firm size (t - 1) 10.711 10.643 0.42 0.675

Fixed assets ratio (t – 1, %) 38.888 37.008 0.82 0.413

Intangible assets ratio (t – 1, %) 4.0785 3.923 0.17 0.863

Export ratio (t – 1, %) 10.491 8.917 0.58 0.56

Firm age (t - 1) 10.986 9.887 0.840 0.404

Leverage (t – 1, %) 61.3 65.643 -1.460 0.145

N 141 141

Hotelling test T 2

F-stat p [ F N

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