Abstract
This paper identifies the main contributors to the remarkable five-fold improvement of eco-efficiency (output per pollution emission) in China's manufacturing during the period 1995-2006. We are especially interested in the role of FDI in this improvement. We refine the conventional index decomposition method to differentiate the impacts of foreign-invested enterprises (FIEs) from those of domestic firms. Applying the method to China's SO2 emissions, we find that (i) both FIEs and domestic firms have shifted towards cleaner industries; (ii) the better production or abatement techniques of FIEs explain 23% of China's eco-efficiency gains; and (iii) another 69% of China's eco-efficiency gains can be accounted for by progress in the production or abatement techniques of domestic firms, which is positively associated with horizontal and vertical spillovers from FIEs. Findings (ii) and (iii) lend support to the so-called Pollution Halo Hypothesis.
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