Going Out by Doing Good: The Effect of Mandatory CSR Disclosure on Outward FDI of Chinese Firms

By | October 11, 2022

China has become a major global investor and witnessed massive amounts of outward foreign direct investment (OFDI) in recent years. Prior studies have shown that OFDI can be an important channel through which Chinese firms explore market opportunities, acquire strategic assets, and exploit global network linkages. However, internationalizing Chinese firms usually face the so-called liability of foreignness (LOF) when investing abroad. In other words, they incur additional costs relative to local firms due to the lack of legitimacy, differences in institutions, and disadvantaged positions in local business networks. Therefore, to improve the performance of Chinese OFDI, it is crucial to understand how to help Chinese firms gain legitimacy and increase competitiveness in foreign markets. 

CSR and Firm Internationalization 

One potential instrument for multinationals to overcome the costs of investing abroad is corporate social responsibility (CSR), or taking care of social and environmental issues beyond their economic interests. From the firm’s perspective, disclosing CSR information would mitigate the agency problem between the stakeholders and managers so that the latter have incentives to focus more on long-term value creation and engage more in innovation activities, which are important for conducting OFDI. Moreover, by enhancing stakeholder engagement, CSR disclosure may help increase transparency and reduce information asymmetry, facilitating external financing and relaxing borrowing constraints. From the viewpoint of the business environment, conforming to regulations, social norms, and expectations in the host market can increase the acceptance and recognition of a multinational, which helps reduce biases attributed to differences in culture and institutions between the home and host countries. Despite the important role CSR could play in encouraging OFDI, few studies have systematically examined the influence of CSR activities and disclosure on the FDI of multinationals. In our recent working paper, we aim to narrow this research gap by investigating the effect of CSR disclosure on the OFDI of Chinese firms. 

CSR Disclosure in China 

In recent years, the Chinese government has issued various policies and regulations to encourage firms to actively undertake social responsibilities to achieve sustainable development goals. In particular, the 2006 Chinese Company Law revised by the National People’s Congress formally included corporate social responsibility in Article 5. Despite these efforts, however, initially, only a few firms would voluntarily disclose their CSR initiatives. According to the Research on Corporate Social Responsibility Reporting in China 2010, a limited number of CSR reports were disclosed before 2008, only 32 in 2006 and 169 in 2008. 

To improve the disclosure of CSR, in December 2008, the Shanghai Stock Exchange (SSE) published the Notice of Doing a Better Job for Disclosing 2008 Annual Reports, requiring firms listed in its “Corporate Governance Sector,” companies that issue foreign stocks overseas and financial enterprises, to release a special report on the fulfillment of social responsibilities along with their annual report. Around the same time, the Shenzhen Stock Exchange (SZSE) also stated CSR disclosure targeting all firms in its “Shenzhen 100 Index.” The announcement and the guidelines on CSR in the SZSE require firms to be publicly transparent about their activities in environmental protection, sustainable development, public relations, social services, and the protection of the rights and interests of shareholders, employees, suppliers, and customers. As the Chinese government owns the SSE and SZSE, the government and the public supervise the CSR disclosure of the involved firms. 

Research Design 

We employ the unique quasi-natural experiment of the mandatory CSR disclosure enacted in China in 2008 to identify the OFDI implications of CSR disclosure. Specifically, we use a difference-in-differences (DID) approach to compare the change in OFDI of the mandatory CSR disclosure firms (treatment firms) to that of the non-CSR reporting firms (benchmark firms) before and after the CSR disclosure mandate. We also apply the propensity-score-matching (PSM) procedure to reduce the systematic differences between the treatment and benchmark firms. 

Main Findings 

We find that mandatory CSR disclosure firms are more likely to undertake OFDI and have a larger number of OFDI projects. The results show that mandatory CSR disclosure firms experienced an increase in the number of patents (both patent applications and acquisitions) after implementing the CSR disclosure mandate. This implies that reporting CSR activities may provide incentives for innovation, which is a critical factor of OFDI. Also, our results show that mandatory CSR disclosure helps decrease the financial constraints for treatment firms, thereby promoting OFDI. In addition, we find that industrial wastewater discharge and SO2 emission decrease in the treatment cities (more impacted cities) after the implementation of the policy, which supports that the disclosure mandate significantly reduces environmental pollution and can help multinationals alleviate the LOF when they conduct OFDI.  

Further, we find differential effects of mandatory CSR disclosure on OFDI from different firms in different destinations and industries. First, mandatory CSR disclosure has a stronger impact on OFDI in developed than developing economies. This suggests that reporting CSR can promote OFDI by mitigating the LOF, especially in developed markets with relatively strict laws and regulations regarding CSR. Second, mandatory CSR disclosure exerts a positive effect on OFDI for non-polluting firms, suggesting that environmental concerns may act as a general barrier to OFDI. Third, mandatory CSR disclosure promotes OFDI from firms with state-owned shares because these firms are more inclined to assume social responsibilities in response to the government’s requirements, given the important role of the Chinese government in economic affairs. Lastly, mandatory CSR disclosure is more important in promoting OFDI for larger firms than for smaller ones. As large firms often outperform in CSR-related fields, mandatory CSR disclosure can help them better publicize their contributions to social responsibilities, which is more conducive to shaping their corporate image and reducing the LOF when investing overseas. 


Our findings provide some important academic and policy implications. By exploring the causal effect of mandatory CSR disclosure on OFDI, we present some real economic effect of CSR regulations in the field of international economics. This adds to the existing literature by connecting the studies on CSR and those on cross-border investments. Practically, it is vital to realize the significance of mandatory CSR disclosure in increasing firm productivity and investments. While we focus on the CSR disclosure mandate enacted in China that facilitates a causal interpretation, the implications of our study may be potentially pertinent to policies promoting OFDI in other emerging economies. In developing countries like China, with relatively underdeveloped market-supporting institutions and a low level of voluntary CSR disclosure, implementing mandatory CSR reporting can be an effective way to help firms explore international markets. 

Yi Zhang is a Professor of Economics at the Jinhe Center for Economic Research at Xi’an Jiaotong University. 

Wei Xue is a Ph.D. candidate in Jinhe Center for Economic Research at Xi’an Jiaotong University. 

Chun Liu is an Assistant Professor of Economics in the School of Economics at Southwestern University of Finance and Economics. 

This post is adapted from their paper, “Going Out by Doing Good: The Effect of Mandatory CSR Disclosure on Outward FDI of Chinese Firms,” available on SSRN. 

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