Abstract
By applying the wavelet tool, this study examines the effect of foreign direct investment (FDI) on pollution in China, for the period 1982 to 2016. Carbon dioxide and sulfur dioxide emissions are used as pollution variables. The results reveal that FDI positively affected pollution at high frequency (short term) during the 1980s and after 2000, and at low frequency (long term) but not at medium frequency (medium term) for the entire time period. It demonstrates that FDI increases pollution both in the short and long term, but not in the medium term. It indicates that FDI has created pollution havens in China. For robustness analysis, spectral causality test was applied. The results of this causality test indicate that FDI causes CO2 emissions both in the short-run and long-run. This suggests that in China FDI predicts CO2 emissions. Thus, stringent environmental rules are required to restrict the inflows of foreign dirty industries in China.
Highlights
For sustainable economic development, improvement in environmental quality is indispensable
Foreign direct investment (FDI) is an international activity which is indispensable for economic growth, it affects the environment of the host country
Zheng and Sheng [48] have shown that FDI has increased China’s pollution after market-oriented reforms
Summary
The technique effect postulates that foreign firms may bring more environmentally friendly techniques, which will have spillover for local firms [19] It will improve the environment by reducing emission as resources will be efficiently utilized, and thereby less pollution will be emitted. If scale effect dominates pollution will increase with FDI This theoretical trade-off has stimulated researchers to empirically investigate the effect of FDI on the environment in the host country. Some studies have been conducted to examine the effect of FDI on the environment in China, more empirical analysis is required for several reasons. Empirical literature has provided contradictory results for the effect of FDI on the environment in China.
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