Effects of foreign direct investment on carbon emissions: Evidence from China and its Belt and Road countries

Abstract

This paper examines the effects of China's foreign direct investment (FDI) on the carbon emissions of its domestic economy and the Belt and Road countries (BRCs). Total inward FDI into China as a host country shows a pollution reducing effect in the western and eastern regions while that in the central region remains unchanged. But China's outward FDI particularly from its eastern region reduces pollution in China. This suggests that China could be exporting carbon emissions via its FDI in the BRCs. The effects on BRCs' pollution from China's FDI is however different depending on the country's level of development. China's FDI was found to have no effect on high and upper middle income BRCs; a decreasing effect on low income BRCs; and an increasing effect on lower middle income BRCs. Evidence shows that China needs to consider a mix of policies to manage its inward and outward FDI to ensure its move to a low carbon economy benefits its own regional development and the BRCs by not contributing to increased carbon emissions.