Does Air Pollution Crowd Out Foreign Direct Investment Inflows? Evidence from a Quasi-natural Experiment in China

Abstract

This study investigates whether air pollution crowds out foreign direct investment in China. We use a regression discontinuity design based on the lower air pollution to the South of the Qinling Mountains–Huai River line because the government did not develop coal-based central heating networks there, contrary to north of the line. We observe that for every 1% increase in PM2.5 concentration, foreign direct investment flows decrease by 0.393%, and foreign direct investment stocks decrease by 0.015%. By tracing the potential mechanisms, we find that air pollution may exert a negative impact on foreign direct investment inflows through its impacts on the health risks of the labor force and health insurance spending of foreign firms.