Out with the breath, out with the firms: Air pollution and foreign-invested firms exit in China

While existing studies have focused on the economic determinants of foreign firm exit, few have considered the influence of environmental factors. This study addresses this gap by examining how air pollution affects the foreign-invested firm exit in China, employing a regression discontinuity design to identify causal effects. The results reveal three key findings. First, high levels of air pollution significantly increase the likelihood of foreign firm exit, with heterogeneity across cities differing in economic development, government environmental attention, and foreign firm incumbents. Second, three influencing mechanisms are identified, that is, reductions in labor productivity, labor stock, and financial support. Third, foreign firms exhibit the highest sensitivity to air pollution, followed by private firms, whereas state-owned firms show insignificant responses. This study contributes to the theoretical understanding of how air pollution affects foreign firm dynamics, and provides strategies to enhance environmental governance to improve air quality and sustain foreign investment.