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

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.