Does foreign ownership promote environmental protection? Evidence from firm-level data

This paper examines the role played by foreign ownership as a determinant of the environmental behaviour of Spanish manufacturing firms. Unlike previous studies, our analysis distinguishes between current expenditure on and investment in environmental protection as a way of examining potential differences in the firms' short- and long-term strategies. The results show how foreign capital boosts expenditure and especially investment. We also highlight the relevance of accounting for heterogeneity at the firm level by focusing on certain structural characteristics that are key in the manufacturing sector, namely, the size of the firm and the sector of activity where it operates. Our results show that size has a positive effect on firms' decisions about environmental protection. The empirical results also reveal that the beneficial impact of foreign investment is mainly channelled through small firms and it is most evident in industries which are subject to less environmental regulation. Our findings may have pertinent implications regarding the determinants of firms' environmental behaviour and about the effectiveness of foreign participation as a mechanism for overcoming potential barriers in the adoption of environmental protection measures by small firms. Plain English Summary Macro-level studies conclude that foreign ownership promotes environmental protection. But what does firm-level data say about the matter? We contribute to the scarce and controversial evidence about this topic at the firm level by using data from a large sample of Spanish manufacturing firms. Our results show that foreign capital drive decisions on expenditure and, especially, in investment in environmental protection. We also reveal that the role played by foreign ownership in the adoption of environmental protection measures is particularly relevant for small businesses, and it is most evident in industries which are subject to less environmental regulation. These findings provide useful insights about the effectiveness of foreign capital participation as a mechanism for overcoming potential barriers in the adoption of environmental protection measures. This is particularly relevant in the case of small firms, which are predominant in the manufacturing sector of most countries.