Escaping regulation or embracing innovation? Substantive green Innovation's role in moderating environmental policy and outward foreign direct investment

Abstract

There is ongoing debate about the relationship between environmental regulations and firms' outward foreign direct investment (OFDI), and there is a lack of research focusing on the relationship between city-level environmental regulations and OFDI in developing countries. Using city-level data from China (2005–2021), we analyze the effect of environmental regulation on firms' OFDI. Our results reveal a statistically significant positive relationship between the intensity of environmental regulations and increased OFDI, demonstrating that firms may respond to stricter regulations by shifting investments abroad. Heterogeneity analysis indicates that the impact of environmental regulation on OFDI not only shows significant regional heterogeneity and presents a unique “N-shaped” relationship in heavily polluting industries. Furthermore, we innovatively examine the moderating roles of substantive and symbolic green innovations on the effect of urban environmental regulations on OFDI. The results indicate that substantive green innovation can help firms adapt to stricter environmental policies while maintaining competitive investment strategies. Finally, this study offers essential insights for policymakers to align city environmental policies with firms’ OFDI strategies, balancing environmental protection and sustainable development.