Environmental regulation, foreign direct investment, and export sophistication of China: an empirical study based on dynamic system GMM and threshold model.

Abstract

The mechanism of how environmental regulations (ERs) affect export sophistication (ES) is complex, and for many years, it has been a hot topic for researchers. However, few previous studies have focused on whether ERs can promote the upgrading of China's ES through foreign direct investment (FDI). To address this research gap, in this study, ERs, FDI, and ES were incorporated into one novel research framework. Based on the provincial panel data of China for the period ranging from 2004 to 2016, the system generalized method of moments (SYS-GMM) was utilized to analyze the mutual relationship between FDI, ERs, and ES. Then, the panel threshold model was employed to empirically investigate the upgrading of the ES that is determined by FDI under different-intensity ERs. The results were as follows: First, ERs lead the influx of foreign capital to China, as a "pollution shelter" of developed countries, but excessive ERs have negative effects on FDI, resulting in an inverted U-shaped relationship between ERs and FDI. Second, the upgrading of the ES was affected by FDI, with the trend following a U-shaped curve. Third, the ERs have significant direct effects on the upgrading of the ES in the form of a U-shaped relationship, which was determined by the combined "innovation compensation" and "cost offset" effects. Finally, the environmental regulations had indirect influences on the upgrading of the export sophistication through the linkage effect of FDI in the form of an N-shaped relationship. Based on the aforementioned achievements, some policy recommendations were proposed to promote the upgrading of the ES in the future.