Foreign divestment: unveiling its influence on firms’ green innovation activities

Foreign subsidiaries from developed countries play a crucial role in disseminating green production technologies and fostering green innovation in developing countries. However, recent years have witnessed a significant rise in foreign divestment from developing countries due to the resurgence of trade protectionism. The impact of this trend on the green innovation efforts of divested firms is a critical area of investigation. Our research uses a sample of Chinese listed firms and employs the differences-in-differences method, demonstrating that divested firms have increased their R&D investment and improved their green innovation output in the short term. We propose three possible explanations for this outcome. First, foreign divestment leads to shifts in innovation strategies and raises unit R&D costs, prompting divested firms to increase R&D spending to maintain an optimal level of green innovation. Second, to reduce the tax burden caused by foreign divestment, these firms are incentivized to enhance their investment in green innovation to qualify for government policies favoring high-tech and green firms. Lastly, to mitigate the loss of green technological resources caused by foreign divestment and absorb existing green research outcomes from their foreign parent firms, divested firms boost R&D investment in the short term. Finally, we conducted extended analysis, which provided validation for the proposed explanations.