Examining the relationship between environmental regulations and foreign direct investment level: evidence from China

Abstract

This study examines the relationship between the environmental regulations and the FDI levels in China. The environmental regulation stringency is measured using emissions and other energy consumption data. The study is based on the pollution haven hypothesis and additionally applies direction of causality tests. The main objectives of the study are: to measure the environmental regulatory stringency and to identify the relationship between the application of the environmental restrictions and the level of FDI in China in the period from 1979-2013. The study adopts a quantitative approach; a correlation matrix, a multiple regression model, and granger causality are used first; then a time series multiple regression model is conducted; afterwards the granger causality is applied. The results of the statistical analysis show a negative relationship between environmental regulations and FDI levels and a negative bidirectional causal relationship between the emissions and energy consumption variables and the FDI levels. Thus, countries aiming at increasing their FDI levels need to consider their environmental regulations. In addition, the study provides useful information to other developing countries which are still in less developed stages, as it can have policy implications on increasing the FDI levels and on the environmental regulations.