Can Foreign Institutional Investors Stimulate Environmental Innovation? Evidence From China’s Stock Market Liberalization

Abstract

In this paper, the Mainland-Hong Kong Stock (MHKS) Connect Program is used as a quasi-natural experience to study the relationship between foreign institutional investors and environmental innovation. Using the sample of the Chinese mainland A-Share market industrial firms from 2012 to 2019 and Difference-In-Difference model, we find a promoting effect of the foreign institutional investors on the mainland firms’ environmental innovation. The mediating effect tests prove that foreign institutional investors inspire environmental innovation through monitoring channel (supervising the environmental innovation), insurance channel (tolerating innovation failures) and knowledge spillover channel. It is noteworthy that only firms in the regions of high innovation capacity benefit from the knowledge spillover channel. Our study implies that environmental innovation can benefit from the opening-up of the stock market if it can attract foreign institutional investors who fulfill the roles of monitoring, insurance and knowledge spillover.