CEO Foreign Experience and Green Innovation: Evidence from China

Throughout the paper, we call this group of people “returnee managers” and use it interchangeably with “CEOs with foreign experience”.

Green innovation refers to the improvement of products or manufacturing processes to reduce energy consumption or to generate less waste and thus create a lower environmental burden (Chen et al., 2006; Rennings, 2000).

The China Statistical Yearbook 2016 shows that the number of individuals who received foreign training and then returned to China increased from about 5000 in 1995 to over 400,000 in 2015.

While Post et al. (2011) find that boards with a higher proportion of Western European directors are more likely to implement environmental governance structures or processes, we differ from Post et al. (2011) in the following ways. First, Post et al. (2011) focus on board composition/diversity and look at 78 firms from the Fortune 1000 that have more Western European directors. Thus, their focus is on the monitoring/advisory role played by directors, which is related to corporate governance. We, on the other hand, focus on the role played by CEOs. Second, the concept of “foreign” in their paper is nationality. In contrast, we examine the effect of social interactions through learning/working in foreign countries/regions on executives with the same ethnicity who return to work in their home countries. Post et al. (2011) does not have this “returnee” concept. Third, in addition to the “environmental ethics” argument Post et al. (2011) explored, we also propose that foreign experience enhances the general competencies of CEOs. Finally, it is not clear where the companies in Post et al. (2011) are located. Therefore, it is possible that their findings are driven by the geographic location of firms. We do not have this issue because our sample includes Chinese public firms only.

Literature also finds that foreign experience may lead to an increased interest in world economic conditions, greater open-mindedness and tolerance of differences, increased empathy (Black & Duhon, 2006; Thomlison, 1991), and increased sense of responsibility and respect for others (Chieffo & Griffiths, 2004). Many of these personality outcomes may influence a CEO’s motivation toward pursuing socially responsible activities.

Domain-specific knowledge also includes better management practice and managerial skills if the returnee CEOs have chances to observe or experience them.

Foreign experience also increases the CEO’s global network (Edström & Galbraith, 1977; Suutari & Makela, 2007). As new and difficult demands during the innovation process arise, the CEO with foreign experience has a novel and valuable network on which to draw for advice and assistance. Moreover, Giannetti et al. (2015) suggest that hiring managers/directors who have gained either education or work experience while living abroad in developed countries help transmit knowledge about management practices and corporate governance to firms in emerging markets.

In footnote 7, we mentioned that foreign experience increases the CEO’s global network. Global networks would be very helpful when CEOs with foreign experience need advice or assistance. However, when it comes to capital, since most companies raise funds from financial institutions in their own country, CEOs with foreign experience are at a disadvantage compared to their local peers because they usually have limited connections with critical local constituents.

According to the securities laws in China, a company reporting losses in two consecutive fiscal years should be labeled with a special treatment sign (ST/*ST). These firms are subject to a daily price fluctuation limit of 5% and will be terminated from listing if they report losses in four consecutive years and report negative net assets in three consecutive years. Stocks labeled with PT are those that are suspended from trading.

While the IPC Green Inventory List is usually used to identify green innovations, we do find patents that are obviously “green”, but their IPC numbers are not in the IPC Green Inventory List. To be as comprehensive as possible, we use textual analysis method to further identify green innovations. Our results are robust, however, if we only rely on the IPC Green Inventory List to identify green innovations.

Invention patents refer to new technical solutions for products, methods, or improvements. A utility model refers to a new technical solution suitable for practical use proposed for the shape, structure, or combination of the product. Appearance design refers to a new design that is esthetically pleasing and suitable for industrial applications based on the overall or partial shape of the product, its combination, and the combination of color, shape, and group.

We follow Development Policy and Analysis Division (DPAD) and Social Affairs of the United Nations Secretariat (UN/DESA) to define the developed country or region.

There are 72 observations with foreign CEOs. It accounts for 0.57% of our sample.

SA index is calculated with the following equation: \(SA=-0.737*Size+0.043*{Size}^{2}-0.04*Age\), where size is the logarithm of total assets (in million RMB) and age is the firm age (in years). We calculate FC as the logarithm of the absolute value of SA.

Note the measure is the natural logarithm of one plus the number of green patents, so the raw number is 0.232 (= e^0.209− 1).

We did another robustness check. We reduce the panel dataset to one observation per CEO by taking average of all the variables at the CEO level and re-run the regression. Consistent with our main finding, we find that the CEO foreign experience is positively related to green innovation measures.