Foreign-Funded Enterprises and Pollution Halo Hypothesis: A Spatial Econometric Analysis of Thirty Chinese Regions

Alexandre Repkine,Dongki Min

doi:10.3390/su12125048

Abstract

China is one of the world’s major environmental polluters, therefore, Chinese environmental efficiency is an issue of global importance. In this study, we aim to identify economic factors affecting environmental efficiency scores in different regions of China from a spatial econometric perspective. We measure environmental efficiency scores, relative to the theoretically consistent production possibilities frontier estimated, according to a novel iterative methodology. As expected, we find that environmental efficiency scores are negatively affected by the prevalence of heavy industry sector in the economy, with a higher share of coal as a source of energy exacerbating the problem. We also find evidence that strongly support the pollution halo hypothesis, which credits foreign-funded enterprises with producing in a more environmentally-friendly way. Surprisingly, we find a negative association between the share of tertiary sectors in a regional economy and environmental efficiency—emphasizing the need to address the indirect effects produced on the environment by the seemingly innocuous sectors, such as the hotel sector. We encourage the creation of foreign-funded enterprises, and support formulating environmental protection policies that consider the indirect effects various economic sectors have on the environment.

Highlights

As environmental concerns grow around the globe, the role of the world’s major polluters, such as China, in affecting the environment increases in importance
We aim to examine whether active engagement in the international trade in general, and in exporting activities in particular, on the side of the foreign-funded enterprises (FFE) is beneficial for environmental efficiency
We found that the null hypothesis of joint insignificance of the spatial fixed effects can be rejected at a 0.01% significance level with the test statistic of 572.62 and twenty-nine degrees of freedom

Summary

Introduction

As environmental concerns grow around the globe, the role of the world’s major polluters, such as China, in affecting the environment increases in importance. An important feature of this plan is its formulation in terms of reducing the levels of harmful emissions by a specific amount, e.g., 8% for SO2. Environmental (in)efficiency is often defined in terms of the distance between the observed combination of a good and bad output, and their projection on the best-practice frontier—which is a textbook definition of productive efficiency applied to the environmental context. The best-practice, or production possibilities frontier (PPF), is defined as a locus of combinations of a good (steel) output y and bad (CO2) output b such that for each possible b the value of y on the frontier is the maximum possible amount of good output for that particular level of pollution b

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