Environmental Regulation, Institutional Distance and China’s Outward Foreign Direct Investment in the Belt and Road Countries

Abstract

Purpose - This study aims to explore the direct impact of environmental regulation on outward foreign direct investment (OFDI), and the moderating role of institutional distance in the relationship between the two, focusing on China’s OFDI in 58 countries along the Belt and Road (BRCs) during the period 2003-2021.
 Design/Methodology/Approach - The fixed effects model, DID model and panel threshold model are adopted in the basic estimation and heterogeneity tests.
 Findings - The results show that environmental regulation has a significant positive impact on China’s OFDI into the BRCs, and institutional distance has strengthened this positive impact. But this moderating effect can only be detected when the institutional distance is positive. Comparative analysis before and after the Belt and Road Initiative (BRI) showed that the impact of environmental regulation on China’s OFDI was greater after BRI than before BRI. Furthermore, the significant impact of environmental regulation on OFDI could only be observed in countries with relatively stringent environmental regulation. Threshold tests found that there is a threshold value in the impact of environmental regulation on OFDI. The DID estimation results showed that when the institutional level and environmental regulation level of the host country are lower than that of China, the BRI plays a greater role in promoting China’s OFDI into the BRCs.
 Research Implications - The findings have significant implications for understanding how China’s OFDI responds to the environmental regulation of the host countries, simultaneously considering the impact of institutional distance.