3.1. Internationalization and Corporate ESG Performance
International firms have to face institutional pressures internally and externally in the countries where they have a presence [
24,
40] along with international values and global legitimating factors [
41]. Therefore, firms have to put up efforts in order to obtain legitimacy and to maintain a competitive advantage [
6]. Firms may perform substitute practices to achieve legitimacy in an international market, such as disclosing their environmental information [
7]. The corporations have to achieve moral legitimacy based on normative authorization in foreign markets [
25] by increasing their environmental actions beforehand in their international processes [
21,
42,
43].
Environmental management helps in reducing waste and emissions by applying the practices in the processes of firms in order to attain better environmental performance [
44]. Developing this kind of environmental capability could also help the firms in reducing the cost and increasing the benefits by achieving environmental compliance. Berchicci et al. [
45] contend that environment-related technologies, capabilities, and skills need to be developed to become more effective in reducing pollution, thereby allowing better environmental performance. Resultantly, such capabilities allow firms to strategically operate in other countries rather than taking advantage of the host country’s lack of environmental regulations [
46]. Kennelly and Lewis [
47] find that the degree of internationalization is positively associated with corporate environmental performance. On the other hand, Christmann [
14] investigated a plethora of studies concerning internationalization and concluded that firms operating in international markets are under pressure to respond to the diverse demands of stakeholders, including host-country regulations. The inability to respond to the host economy’s policies will lead to litigation charges. Their research also suggests that firms with stringent compliance to host-country regulations achieve higher environmental performance. However, globalization puts multinationals under the stakeholders’ vigilant evaluation of firms’ environmental strategies and policies, where there is a probability of negative response [
18], and upsurges the need for moral legitimacy [
25].
It seems logical to determine the fact that globalization has led firms to a broad set of pressures from a variety of stakeholders, global values, and legitimating actors that oversee the firms’ sustainable actions in an international market. Thus, to meet the demands of stakeholders concerning environmental issues, firms should embrace environmental policies and practices to cope with the complexities of global markets and to attain moral legitimacy. Likewise, we assert that corporate environmental performance positively responds to the development of foreign subsidiaries. Hence, we posit the following:
Hypothesis 1a (H1a). Internationalization has a positive impact on the environmental performance of Chinese multinationals.
Multinational firms are expected to have increased pressures from economically, culturally, institutionally, and politically diverse stakeholders to initiate and process CSR activities and integrate the activities in their operations. Sanders and Carpenter [
48] argue that the level of internationalization is accompanied by the challenges associated with the survival of multinationals in international markets, such as the cultural and institutional differences that firms have to embrace with the use of their geographically dispersed resources. In general, internationalized firms should consider the demands of a wide range of stakeholders, including non-governmental agencies [
49].
Multinational firms have to adapt their strategy in response to the increased pressure and demands from the different stakeholders. Some argue that firms should invest in sustainable activities to mitigate the negative influence of their business decisions on the environment, which may enhance satisfaction among internal stakeholders (employees) [
15]. Therefore, we can assume that higher social performance is a gauge of determining a firm’s response to the demands of different stakeholder groups [
50].
We contend that internationalized firms adopt various CSR activities in response to the increasing demands of stakeholders. For instance, Kang [
51] noted that a global strategy reduces the managerial employment risk due to a firm’s dependence on manager-centered policies and skills required to accomplish various tasks. Hence, it would be difficult and costly to replace present managers. Consequently, it will increase the probability that managers use ample firm resources to respond to stakeholder pressures [
50]. In addition, when multinationals operate in an international market, they have to encounter various litigation risks if they violate any unfamiliar societal and/or regulatory requirements. Firms are exposed to legitimacy risk when entering into the foreign market, and this perceived risk can be decreased and their reputation can be strengthened in social responsibility by investing in sustainable actions. Feldman et al. [
52] state that proactivity in respect to sustainability-related activities allows firms to minimize perceived risk. Similarly, Brammer et al. [
20] also contend that stakeholder perceptions about corporate social behavior lead them to believe in a firm’s affairs for a long time. Moreover, internationalized firms can depict their level of commitment to an international market by adopting sustainable operations that not only improve their CSR communication [
53] but also reduce the adverse effects of psychic distance. Lastly, internationalization strengthens the managers’ risk aversion ability. To mitigate a firm’s risk, caused by regulators, activists, and product users, managers tend to abide by all the rules and laws of a host country [
54] and enhance their CSR-related activities. The problems created by regulators, activists, and consumers not only tarnish the image but also increase litigation costs. Moreover, internationalized firms face immense media attention and stock market coverage [
50], so managers have to deal with pressure from both local and global stakeholders.
Kang [
51] presents evidence of a positive relationship between firm internationalization and the social performance of MNCs. They argue that, when a firm enters an international market, it encounters different social issues and stakeholder concerns due to the varied societal priorities of the host countries [
55]. Zyglidopoulos [
56] contends that internationalized firms face different sets of pressures relating to social and environmental responsibilities as compared to the companies that are in competition with them in the country in which they are operating. Thus, when a firm goes global, it should develop its CSR strategies and execute various sustainable practices. The reason behind increased CSR activities is the negative response from various stakeholders. Furthermore, globalization releases “managers from shareholder pressures” and enables them “to pay more attention to the stakeholder and social issues” by diversifying geographic sources of income [
53] (p. 99). In addition, internationalization enables corporations to benefit from economies of scale, as it allows firms to leverage their resources and enhance their CSR-related operations in foreign subsidiaries [
51]. Lastly, we argue that as firms go global, many NGOs can make them targets for their campaigns in the international market [
57]. CSR activities can become a shield for such threats. Therefore, we posit the following hypothesis:
Hypothesis 1b (H1b). Internationalization has a positive impact on the social performance of Chinese multinationals.
The performance of companies is also affected when they go global. Firms are affected by the performance at three levels during internationalization, as mentioned by Muliyanto and Marciano [
58]. There is a negative association between internationalization and firm performance at the first level of internationalization. At the second level, firm performance increases as companies become more informed and able to manage the problems in the global market. At the third and highest level, firm performance is decreased again because of the increase in complexity due to internationalization. Firm performance is taken as a benchmark for companies, and they try to improve their performance using different governance methods [
58]. Therefore, we can say that internationalization affects the corporate governance of companies.
Companies are faced with different problems during the internationalization process. They must implement effective governance practices for smooth internationalization. A good corporate governance structure helps in overcoming cultural differences, spatial distance, and communication problems. An effective governance structure can enable corporations to maintain their good image in the market and manage company personnel [
59]. The effective governance score can be achieved with the help of the positive role of the board and its small size, engagement of the board, the absence of external members, good communication channels, and the absence of external member resources [
59].
Al Mamun and Badir [
60] studied the corporate governance of companies and found that competitive advantage can be gained if companies can magnify the corporate governance apparatus. He and Cui [
61] studied the relationship between corporate governance and internalization in China and found that companies that are better able to implement corporate governance practices gain high profitability and better performance in the international market. They found that there is a positive relationship between corporate governance and the performance of companies in the international market. When the companies have good corporate governance and have implemented straight rules, they feel safer and more confident in the internationalization process. Hence, we can say that companies that have well-implemented corporate governance can easily go into internationalization. Moreover, Felicio et al. [
62] identified that corporate governance helps in the implementation of the global mindset, which ultimately affects the internationalization process. However, Kraus et al. [
63] found that there is a negative correlation between corporate governance and internationalization. The research was conducted on German family-owned enterprises, and it was found that lower family participation in corporate structure leads to the better implementation of internationalization of German companies. Muliyanto and Marciano [
58] investigated the interdependence of corporate governance, performance, and internationalization. They created three models to test the relationship and found different results for each model. In one of the three models, they found that performance and corporate governance are positively correlated and that corporate governance has a significant positive impact on the internationalization process. Shanmugashundaram [
64] studied the relationship between the corporate governance of Indian firms and their intention for internationalization, and it was found that better governance practices help firms controlled by a family in the internationalization process. The family-controlled firms can go global through foreign direct investment, and the better the governance practice, the easier the internationalization process.
Hypothesis 1c (H1c). Internationalization has a positive impact on the governance performance of Chinese multinationals.
3.2. ESG Performance of Chinese SOEs and Non-SOEs in the International Markets
The holding of equity in a company is referred to as ownership. Ownership is the most important matter in enterprises because of decision-making rights and cash-flow rights. Moreover, different ownership entities have different priorities in terms of strategies and structures. There are ample studies that have explored the role of state ownership in promoting CSR activities among companies [
9,
65,
66,
67,
68,
69]. The results produced by the prior literature are inconclusive. For instance, Cheung et al. [
9] claimed that SOEs in international markets are less active in terms of their CSR practices than non-SOEs. They supposed that, due to the continuous financial support from the Chinese government, SOEs are not under the influence of external stakeholders to adopt socially responsible actions. Similarly, Shahab et al. [
67] found that CSR quality ratings have less influence on the distress level of SOEs. These results depict that SOEs are backed by governments to avoid any financial issues. On the contrary, Khan et al. [
70] contend that state ownership has a positive impact on CSR performance. In addition, they found that reducing state ownership negatively affects the CSR performance of companies. In a similar vein, Guo et al. [
71] found that the presence of state ownership enhances CSR disclosures. Furthermore, this relationship is stronger with increases in the proportion of state-owned shares. They argue that the shareholder state can participate in a company’s decision-making and incorporate national social policy, which influences management’s social strategies. Hence, companies increasingly undertake social actions.
It is evident from the above discussion that the impact of internationalization on corporate social actions is inconclusive. The heterogeneity in the findings may be due to a country’s own policies and individual manager behavior. As such, each country has its own characteristics, and it is important to consider those characteristics in internationalization. International expansion has different influences for developing countries, as compared to developed countries because of changes in institutional complexities. The social needs of developing countries are different as compared to developed countries because social, environmental, and human rights issues are not of primary importance in developing countries. Non-SOEs can compromise on social and environmental issues, whereas SOEs with a different strategy of expansion may not be able to [
72]. Non-SOEs have different goals for international expansion, and SOEs have different goals. Non-SOEs may internationalize to stay competitive, but SOEs tend to go to other countries that have unstable governments, both politically and institutionally, but have high natural resources [
73]. In this way, privately owned companies have different social, environmental, and governance scores, and SOEs score differently because they have different goals and strategies for international expansion. Bolivar et al. [
65] pointed out that managers are among the influencers of CSR in SOEs, but they do not perform as one would expect them to. Their research showed that a manager’s personal background hinders or encourages them to conduct socially responsible operations while working in SOEs. In general, they argue that a manager’s intentions have a strong impact on their behavior towards CSR issues.
However, it is argued that SOEs pursue social actions in line with the government or national policies. Their legitimacy is in the hands of the government and not pressured by external stakeholders. Non-SOEs adopt social and environmental activities to maintain their legitimacy in the eye of stakeholders, particularly when operating in international markets. Thus, the impact of internationalization on environmental social and governance performance will not be the same for SOEs and non-SOEs. Thus, we hypothesize that (
Figure 3):
Hypothesis (H2). The impact of internationalization on (a) environmental, (b) social, and (c) governance performance is heterogeneous among SOEs and non-SOEs.