GROWTH, FOREIGN DIRECT INVESTMENT, AND THE ENVIRONMENT: EVIDENCE FROM CHINESE CITIES

Abstract

In this paper, we investigate the relationship between economic growth and industrial pollution emissions in China using data for 112 major cities between 2001 and 2004. Using disaggre- gated data, we separate foreign direct investment inflows from Hong Kong, Macao, and Taiwan from those of other foreign economies. We examine two industrial water pollution indicators (wastewater and petroleum-like matter) and four industrial air pollution indicators (waste gas, sulfur dioxide, soot, and dust). Our results suggest that most air and water emissions rise with increases in economic growth at current income levels. The share of output of domestic- and foreign-owned firms increases several pollutants in a statistically significant manner while output of firms from Hong Kong, Macao, and Taiwan either reduces pollution or is statistically insignificant. In this paper, we examine the relationship between economic growth, FDI, and the environment in China. We make three specific contributions to the growth-environment literature. First, we focus specifically on China given the undeniable strain such a large and rapidly growing economy is placing on the natural environment. Studies investigat- ing these issues in China are relatively scarce. Second, since the majority of industrial emissions are released in urban areas, we concentrate our analysis on Chinese cities and examine the city-level characteristics that influence industrial emissions. We believe the use of city-level variables provides more potential explanatory power than the use