Foreign direct investment concessions and environmental levies in China

Abstract

We investigate how foreign involvement in the ownership of privately held entrepreneurial firms affects pollution fees levied by national and provincial governments in China (environmental levies). Because provincial governments have considerable control over environmental policies, differences in environmental levies provide a good proxy for measuring provincial concessions made for the purpose of attracting investment, and particularly foreign direct investment (FDI). Furthermore, because we consider privately held entrepreneurial firms rather than publically listed firms, foreign involvement in ownership provides a good proxy for FDI. We find that firms with foreign ownership do indeed pay lower environmental levies, which indicates that concessions are made to attract FDI to China. However, these concessions are conditional on the level of development of the province offering them, with better developed provinces providing fewer concessions for FDI. We also find that greater concessions are made to foreign joint venture firms having a foreign ownership stake of less than or equal to 50%.