Green spillovers of outward foreign direct investment on home countries: Evidence from China's province-level data

Abstract

In recent years, there has been substantial outward foreign direct investment (OFDI) from China to other countries. Meanwhile, China has taken green development as one of its core future strategies. Questions arise as to whether the OFDI of China brings green spillovers towards home, and should the government encourage OFDI to further promote the domestic green economy? To answer these questions, this study examines empirically the reverse spillovers of China's OFDI on its domestic green development. Based on a panel dataset involving 30 provinces, provincial green total factor productivity (GTFP) is calculated and its relationship with OFDI is discussed for the period of 2006–2015. Then the main results demonstrate whether China's OFDI has green spillovers on the domestic economy and to what extent they depend on provincial heterogeneity in terms of absorptive capability and environmental regulation stringency. At the national level, it is only either when employees in every province have more than 12 years of schooling on average or the environmental legal construction index reaches approximately 611 that China's OFDI can generate significant spillovers towards its green economic growth, such that a rise of 1 unit of OFDI is associated with 2.4% and 3.2% increases in GTFP, respectively. Moreover, green benefits from OFDI cannot be found in the home country unless the stock of OFDI reaches a certain level, i.e., beyond approximately 3361 Chinese yuan (RMB) per capita at the 2005 constant price. At the provincial level, the influence of OFDI on the green economy in the eastern provinces is greater than that in other provinces. Additionally, this study finds that the relationships between OFDI, absorptive capability, environmental regulation stringency, and green economic growth are robust to multiple econometric methods and alternative proxies for threshold variables. Overall, it is indicated that China's OFDI does bring green spillovers to China, but the current effects show large heterogeneities across provinces and are still very limited due to the lack of necessary supporting conditions. Even with the dramatically rising scale, OFDI in most of Chinese provinces has only small effects on local transition to the green economy, calling for the formulation of proper policies to encourage OFDI and enhance its green spillover effect.