Environmental regulations and firm‐level FDI: Evidence from China's 11th 5‐year plan

Abstract

AbstractThis paper investigates the influence of environmental regulations on outward foreign direct investment (OFDI). We first develop a simple model to show that an increase in emission tax in the domestic market induces firm‐level foreign direct investment (FDI) activities. We next take advantage of China's 11th Five‐Year Plan as a quasi‐natural experiment, which imposed different pollution reduction targets across provinces, and examine its impact on firm‐level FDI activities. Our results indicate that more stringent environmental regulations encourage firm‐level FDI participation. Furthermore, (1) firms are more likely to carry out FDI in developing countries instead of developed ones; (2) Compared with distribution‐oriented FDI, firms are more likely to engage in production‐oriented FDI. All results remain robust after controlling for possible policy endogeneity, missing variables, and expectation effect issues, which provides positive support for the pollution haven hypothesis.