Foreign and Domestic Firms' Responses to Environment Regulation in Emerging Markets.

The debate regarding the environmental behavior of foreign firms in emerging markets continues. Both positive and negative views of MNEs are prevalent. In this paper, I argue that despite that foreign firms, on average, exhibit superior environmental performance relative to domestic peers, they also have the intention to behave opportunistically and exploit local institutional voids when they have the opportunity to do so. To examine my argument, I compared the responses of domestic and foreign firms to the environment regulation during the 11th Five-year Plan period in China. I find that while foreign firms that experience substantial liability of foreignness behave significantly better than domestic firms, those that are exposed to less liability of foreignness are no better or worse than domestic peers. This indicates that when foreign firms develop the ability to perceive the informal elements embedded in local regulatory institutions, they are likely to take advantage of the informal elements to seek evasion opportunities. [ABSTRACT FROM AUTHOR]