Abstract
This paper investigates environmental regulation and its impact on inward foreign direct investment (FDI) in developing countries. Based on the Chinese province-industry-level panel data in the period 2001 to 2015, we use a difference-in-difference-in-differences (DDD) model to evaluate pollution haven behavior in the context of China’s 11th and 12th Five-Year Plans SO2 emissions reduction policy. The results show that the policy leads to fewer FDI inflows to its highly-polluting industries in provinces with tougher pollution reduction targets. In addition, the environmental policy has significantly inhibited FDI inflows in provinces with stricter environmental enforcement, while investment in provinces with worse environmental enforcement is insensitive to environmental policy. These findings are consistent with pollution haven behavior. In contrast, FDI in industries with high levels of technology is not significantly influenced by the policy, whereas the FDI in industries with low levels of technology shows a negative response to environmental policy. This is overall evidence confirming a pollution haven effect (PHE), although technology differences could alleviate the negative effects of environmental regulation on inward FDI.
Highlights
Environmental pollution and environmental damage are becoming major concerns in countries around the world, with the result that in many cases, national environmental regulation is being made more stringent to try to improve environmental quality
Stricter environmental regulation may drive firms to shift their pollution-intensive industries to areas with laxer environmental regulations to reduce the costs related to the regulation; this has been described as the pollution haven effect (PHE) [1]
Column 2 presents the results for degree of industrial pollution measured as the proportion of coal consumption: this is significantly negative at the 5% statistical level, with a coefficient of −0.025
Summary
Environmental pollution and environmental damage are becoming major concerns in countries around the world, with the result that in many cases, national environmental regulation is being made more stringent to try to improve environmental quality. Our study in the context of China’s 11th and 12th Five-Year Plans (11th and 12th FYP) SO2 emissions reduction policy uses a DDD model to investigate the PHE and province-industry panel data for the period 2001 to 2015. We use China’s 11th and 12th FYP SO2 emissions reduction policy to overcome the problems related to measuring the environmental regulation stringency across different countries. This policy was formulated by the Chinese central government and implemented simultaneously in all provinces; that is, the whole country is subject to the same environmental policy.
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