Socially responsible investing, a rapidly growing segment of capital market investments, has garnered significant attention in recent years. A new paper by Professors of Economics, Brian Viard and Zhang Gang, at Cheung Kong Graduate School of Business sheds light on the underlying influence of foreign ownership on the environmental and social (ES) performance of publicly-listed firms in emerging markets.
Empirical evidence of what influences ES performance has focused mostly on advanced economies. Examining ES performance in emerging markets is important because in 2021 they represented 86% of the world’s population and produced two- thirds of global greenhouse gas emissions. For emerging markets, it is particularly important to examine the influence of foreign investment, as it may exert more pressure than domestic investment when interest in corporate social responsibility (CSR) is greater in the source country. Their research paper, titled “Foreign Ownership and Corporate Social Responsibility in an Emerging Market: Impacts and Mechanisms,” finds that increased foreign ownership of Chinese firms under the Shanghai and Shenzhen Stock Connect programs increases firms’ ES performance. The paper goes on to ask how it does so.
Previous studies have identified two ways in which investments and CSR performance may interact: firm signaling and investor influence. Firms may invest in CSR performance to signal their quality to investors and investors may intrinsically care about CSR performance and push firms to invest in it. However, the previous literature does not provide a way to disentangle their individual contributions and therefore the long-run consequences of their interaction. In this paper, Professors Viard and Zhang address these issues by providing empirical evidence on how foreign investors influence CSR performance in China and implementing an approach to disentangle the underlying mechanisms.
“This research underscores the symbiotic relationship between foreign investment and ES performance,” notes Professor Viard. “Our findings highlight the dual impact of foreign investors influencing firms to enhance their CSR activities and firms signaling their trustworthiness to attract foreign investment. These self-reinforcing effects result in much greater long-run than short-run effects.”
The implications of this research extend beyond academic circles. Policymakers, investors and corporate leaders can glean valuable insights into the potential benefits of foreign investment on sustainable business practices. The study’s findings also contribute to a deeper understanding of how financial liberalization and foreign capital inflows can positively impact social norms and economic growth.
The full research paper, including detailed methodology, empirical findings and discussions on the underlying mechanisms, can be accessed here.
Research article: Brian Viard, Zhang Gang. “Foreign Ownership and Corporate Social Responsibility in an Emerging Market: Impacts and Mechanisms”. Hong Kong Institute for Monetary and Financial Research and ASEAN Business Research Initiative. (March 2024)
