Xie Hongjun | The Export Effect of ESG: Exploring the Path of China's Trade Transformation

Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.School of International Economics and Trade, University of International Business and EconomicslecturerXie HongjunAttendDepend onCIFERAssistant ResearcherPostdoctoral Fellow, Tsinghua University PBC School of FinanceFeng LuHostGreen Trade Sub-Forum 11，Sharing with collaborators (see below) on the topic of《ESGExport Effects: Exploring the Path of Chinese Trade Transformation》(The Export Effect of ESG: Exploring the Way of Chinese-style Trade Transformation）The article.

Xie Hongjun，He teaches at the School of International Economics and Trade, University of International Business and Economics. He holds a PhD from Nankai University and participated in a joint training program with Cornell University funded by the China Scholarship Council. His main research areas are transnational investment and international trade, with a particular focus on multinational corporation finance. He has published in journals such as *Economic Research Journal*, *Management World*, *World Economy*, *Economics* (Quarterly), *Financial Research*, and *China Industrial Economics*.Economic Inquiry、Journal of Business ResearchPublished several papers in authoritative academic journals both domestically and internationally. Serves as an anonymous peer reviewer for a series of important domestic and international journals. Currently leading projects funded by the National Natural Science Foundation of China (Youth Fund) and the Ministry of Education's Humanities and Social Sciences Youth Fund.   

Xie Hongjun

This paper, based on a strategic ESG perspective, employs a multinational heterogeneous firm model with embedded ESG decision-making to explore the impact of corporate ESG on their exports. Consumer awareness and demand for high-ESG products, along with differences in ESG capabilities among firms, give firms with higher ESG capabilities a new competitive advantage in entering export markets, expanding export volume, and broadening destination scope. Empirically, using export data from listed Chinese manufacturing companies from 2009 to 2016, this paper not only confirms a significant positive effect of corporate ESG capabilities on export probability and export volume, but also shows that the expansion of destination scope explains nearly 80% of the changes in export volume. Mechanism analysis reveals that the international market's export penalty mechanism for firms with declining ESG capabilities is dominant, while the export reward mechanism for firms with improved ESG capabilities is relatively weak. Product-level evidence indicates that the export promotion effect stems from the triple improvement of product price, quantity, and quality brought about by ESG. Furthermore, exports from moderately polluting, highly nationalized, highly contract-intensive, high-tech, and general trade enterprises are more dependent on ESG in certain aspects. This series of findings deeply reveals the close relationship between ESG and corporate exports and provides a new sustainable development path for the transformation of trade towards high standards.   

Since the reform and opening up, leveraging cost advantages to promote export trade integration into the global economy to accelerate domestic development has been a successful reform experience. However, with the rise of social responsibility issues such as climate change, common prosperity, and corporate governance, the export model relying on low-cost competition is facing enormous challenges from the environmental, social, and governance (ESG) perspectives. In particular, the accelerated layout and evolution of global value chains have meant that ESG issues are no longer limited to the companies themselves or their domestic scope, but are continuously expanding along the production chain. Driven by government policies, institutional pressures, and consumer awareness, multinational corporations are increasingly conducting responsibility reviews of their supply chains, significantly increasing the risk of export companies that do not meet ESG standards being excluded from the supply chain. In this context, how export companies should respond and whether adopting ESG strategies can help overcome cost disadvantages and social responsibility pressures have become key issues for stabilizing export volume and promoting trade transformation. However, neither theoretically nor empirically has a consistent answer regarding the impact of ESG on corporate exports. This paper's main contributions are: 1. It systematically reveals, both theoretically and empirically, the broad and positive impact of ESG on corporate exports. 2. The discussion of potential mechanisms helps to deepen the understanding of the inherent logic of ESG promoting exports. 3. The results of this paper also have significant academic and practical value for promoting the export transformation of domestic enterprises.   

This paper first follows the viewpoint of McWilliams & Siegel (2001), discussing ESG decision-making based on a cost-benefit framework from a strategic ESG perspective, and establishing a multinational heterogeneous firm model accordingly. By incorporating ESG factors into the utility function, it explicitly considers consumers' ESG awareness and needs, and draws the following inferences: 1. Given firm productivity, a firm's ESG capability is positively correlated with the ESG level of its products, and there exists a critical value μ* for firm ESG capability, such that firms with ESG capability below μ* only serve the domestic market, while firms with ESG capability above μ* not only serve the domestic market but also export. 2. Given productivity, the higher a firm's ESG capability, the greater its export value. 3. Given productivity, the higher a firm's ESG capability, the more countries it exports to. 4. Under symmetric market entry costs, if the size of national demand follows a Pareto distribution, then the firm's export value is directly proportional to the number of export countries, and the impact of the firm's ESG capability on total export value is entirely absorbed by the destination expansion margin.

This paper uses the Heckman two-stage method to estimate results that preliminarily confirm the four theorems given in the theoretical analysis. The results show that a firm's ESG capabilities not only significantly increase its export probability but also help promote its export scale. From the scale decomposition results, the increase in scale is mainly due to ESG capabilities helping firms broaden the range of export destinations, and this conclusion still holds after simultaneously addressing the issues of sample self-selection and endogeneity. This is because, on the supply side, firms with higher ESG capabilities can produce products at lower ESG investment costs. For firms, ESG investment costs and fixed market entry costs for exports are substitutable, thus high-capability ESG firms are willing to pay higher fixed market entry costs to export to more countries, increasing the number of exporting countries. On the other hand, the marginally increasing ESG investment costs mean that exports have a scale effect; the marginal revenue from exporting to each country increases with the number of exporting countries. This incentivizes firms to improve their ESG levels from the demand side, making a positive correlation between a firm's ESG capabilities and total export value and the number of exporting countries (destination expansion margin).   

To investigate the potential mechanisms by which ESG affects corporate exports, this paper first distinguishes whether the positive effect of ESG on exports stems from international market penalties for companies with declining ESG performance or rewards for companies with improving ESG performance. The paper defines companies with ESG ratings of A-AAA as the high ESG (H) group, and the rest as the low ESG (L) group. Based on the changes in companies' ESG status over the previous and current years, the observations are divided into four groups: consistently high ESG for two consecutive years, declining from high to low ESG, rising from low to high ESG, and consistently low ESG for two years, generating corresponding dummy variables HH, HL, LH, and LL. Using HH as a reference, HL, LH, and LL are used as core explanatory variables for regression testing. The regression results show that exports from companies with declining ESG capabilities decrease significantly, while exports from companies with improving ESG capabilities only increase slightly. In other words, the export penalty mechanism plays a dominant role, while the reward mechanism is relatively weak. Secondly, the paper uses product-level export data to focus on analyzing the price and quantity mechanisms, and to understand the reasons for the scale effect of ESG on exports.

This paper uses export sample data at the firm-product-destination-year level, decomposing export scale into export quantity and export price, and conducts an empirical analysis of how firms' ESG capabilities affect product export quantity and price. The results show that the coefficients of ESG capabilities are all significantly positive at the 1% level, indicating that higher ESG capabilities not only significantly increase the price of exported products but also simultaneously increase the firm's export quantity. These findings reveal a dual mechanism of "high price-high quantity" in the firm's ESG export effect, alleviating concerns and questions arising from the production cost effects of ESG, and providing empirical support for firms seeking to shift away from low-price competition in their export models. Furthermore, when examining the impact of ESG on product quality, this paper also confirms the promoting effect of ESG on product quality.

This paper, following the method of Khandelwal et al. (2013), calculated the export product quality at the firm-product-destination-year level, and then conducted regression analysis using export product quality as the dependent variable. Furthermore, the paper estimated the export price after removing quality factors using the difference between export product price and export product quality, measuring the cost effect and conducting similar tests. The regression results show that the positive effect of firm ESG capabilities on export prices mainly stems from the improvement in export product quality. Moreover, the finding that firm ESG capabilities reduce product production costs provides new evidence for addressing concerns about ESG-related production costs. Firm ESG capabilities do indeed help firms move towards a high-standard trade model of "high price - high quantity - high quality," which is beneficial for the transformation and upgrading of export enterprises.

Finally, the paper summarizes the discussion of three potential mechanisms and finds that punitive pressure from the international market is an important reason for companies to adopt ESG strategies. This strategy, in turn, significantly expands the scale of a company's exports by increasing the quantity, price, and quality of exported products.   

This paper also conducted a heterogeneity analysis on industry pollution intensity, state-owned capital participation, contract intensity, and technology intensity, finding that moderately polluting, highly state-owned, highly contract-intensive, high-tech, and general trade enterprises are more reliant on ESG capabilities in certain aspects of their exports. Enterprises with these characteristics are the main force in the export transformation process, further highlighting the importance of ESG strategies.   

The paper concludes that, given productivity levels, ESG capability is a key determinant of firms' participation in export markets and changes in export volume. It argues that adopting ESG strategies may be an important path for exporting companies to cope with cost and social responsibility pressures and achieve trade transformation. Theoretical and empirical results also show that prioritizing ESG strategies does not conflict with the profit goals of exporting companies, and the international market's preference for exporting companies with high ESG capabilities creates a new path for the export transformation of domestic enterprises. The paper's findings provide a Chinese-style trade transformation path for companies to use ESG as a breakthrough to escape the "low price-low quality" equilibrium trap and directly confront domestic and international social responsibility pressures.

The author offers targeted suggestions to governments and businesses: For governments, this means increasing financing and policy support for ESG investments, reducing the cost of ESG investments, and incentivizing businesses to transform towards more sustainable development through market cultivation and optimization; For businesses, this means recognizing the returns on ESG investments in the international market and the positive feedback from consumers, continuously improving their own ESG capabilities, and using this as a conscious awareness and action towards sustainable trade transformation.   

Li Haishi

Hong Kong University Business SchoolAssistant ProfessorLi HaishiThis paper first summarizes its main content in terms of objectives, model, and empirical process, and then raises the following questions and suggestions. First, regarding the validity of ESG scores, does the ESG score truly impact a company's environmental and social friendliness? Are these positive or negative impacts truly caused by an increase in ESG scores? Is it a supply-side or demand-side influence? Professor Li Haishi suggests that the author conduct further mechanistic analysis on specific factors. Second, some details can be further revised, such as: in the selection of sample data, Professor Li suggests conducting two-way discussions at the exporter and destination country levels; in the selection of control variables, GDP-related variables can be introduced; and the meaning of variable i in the model needs to be clarified and unified. Finally, Professor Li suggests that after drawing conclusions, explanations can be provided for specific cases, or the paper can be further expanded from the consumer's perspective based on differences in domestic and international values, thus providing direction for the author's future research.