This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting-edge ideas and advice for global leaders about emerging markets.
By Nahyun Kim (Tilburg University), Junxiu Sun (Shanghai University of Finance and Economics), Haitao Yin (Shanghai Jiao Tong University), and Jon Jungbien Moon (Korea University)
In Short: When multinational companies from advanced economies set up operations in emerging markets, they often bring with them higher environmental standards, more efficient technologies, and robust sustainability practices. These aren't just internal improvements—they can create ripple effects throughout the local business ecosystem. For local firms, especially small and medium-sized enterprises (SMEs), this presents a valuable opportunity to learn, adapt, and upgrade their own environmental practices.
Foreign firms tend to apply uniform environmental standards across all their global operations. This consistency helps them streamline compliance, simplify operations, and reduce costs when entering new markets. It also allows them to efficiently transfer green technologies and best practices across borders. With more resources and experience, these companies are often better equipped to respond quickly to evolving regulations and rising stakeholder expectations around sustainability.
For local companies, proximity to these multinationals can be a game-changer. They can benefit in multiple ways—by adopting proven technologies or management systems, receiving direct training and support from foreign partners, or even hiring employees trained by multinationals who bring valuable know-how with them. Competition also plays a role: facing off against efficient, environmentally advanced rivals can motivate local firms to innovate and improve just to stay in the game.
But it's not always easy. Many local firms, especially smaller ones, face steep costs when trying to meet higher environmental standards. This raises an important question: why do some local firms manage to successfully learn and adapt, while others struggle?
To explore this, researchers Kim, Sun, Yin, and Moon studied foreign multinationals like General Motors and Dow Chemical operating in China during a period marked by rapid growth and serious pollution concerns (2000–2007). They found that environmental spillovers from multinationals to local firms are real—but not automatic.
The biggest benefits went to SMEs, particularly those with limited internal capabilities but a strong need for external knowledge. The key was connection. Firms located near foreign companies or engaged in the same business associations and networks were more likely to absorb knowledge and improve their practices. Environmental pressure also played a role—firms based in heavily polluted regions were more motivated to change, proving that necessity can be a powerful driver of innovation.
What This Means for Managers and Policymakers
If you're a local business leader in an emerging market, especially at the helm of an SME, foreign firms operating in your region could be more than just competitors—they could be learning partners. Building relationships, participating in shared networks, and seeking opportunities to collaborate with multinationals can lead to valuable insights, greater resource efficiency, and long-term cost savings.
For multinational executives, this is a chance to make a broader impact. Your sustainability practices don't just protect your own brand—they can improve the performance of the entire local supply chain. Investing in supplier development programs, engaging with local industry networks, and fostering knowledge exchange can generate real goodwill and stronger partnerships on the ground.
Policymakers also have a role to play. The research suggests that spillovers are most powerful in pollution-heavy regions and among SMEs. Supporting policies that encourage clustering, co-location, and public-private knowledge-sharing initiatives can amplify these effects. Targeting the areas and firms most in need can lead to the biggest environmental improvements—and create a more resilient, future-ready local business environment.
Original Work
Kim, N., Sun, J., Yin, H., & Moon, J. J. (2022). Do foreign firms help make local firms greener? Evidence of environmental spillovers in China. Journal of International Business Studies, 53(7), 1370-1393.
Contact
If you are interested in learning more about this work, contact Professor Nahyun Kim at [email protected]