Climate Policy and Foreign Direct Investment: Evidence from a Quasi-Experiment in Chinese Cities

Abstract

International investment is sensitive to environmental policies, and developing countries are worried about the withdrawal of foreign capital when adopting climate policies. This study treats the pilot policy of low-carbon cities as a quasi-experiment and uses urban panel data from 2006 to 2019 to investigate how climate policy affects foreign direct investment (FDI). Results show that climate policy has significantly reduced the FDI in Chinese cities but has promoted the quality of FDI. The regulatory pressure and innovation incentives brought about by climate policy change the quantity and quality of FDI in cities. Climate policy mainly reduces FDI in large cities and improves the quality of FDI in small cities. Moreover, the quality of FDI in capital outflow cities decreases, whereas that in capital inflow cities increases, thereby suggesting a potential transfer of FDI from large to small cities. In addition, the climate policy in innovative cities improves the quantity and quality of FDI but has a negative impact on FDI in non-innovative cities.