How does foreign direct investment influence energy intensity convergence in China? Evidence from prefecture-level data

Abstract

The huge energy intensity gaps among Chinese prefectures make the overall reduction of energy intensity extremely difficult. Energy intensity convergence (EIC), i.e., catching-up of the high energy intensity prefectures with the low ones, is imperative for narrowing these gaps. As one of the most important channels for international technology diffusion, foreign direct investment (FDI) has great impact on energy intensity and may be beneficial for the convergence. Based on pollution haven Hypothesis, however, FDI may result in energy intensity divergence. To provide an in-depth understanding of the mechanisms of FDI-induced convergence/divergence, this paper employs Markov Chain approach to examine the impact of FDI on EIC for 256 Chinese prefectures in the period from 2005 to 2014. Moreover, we particularly emphasis on the influences of local specific characteristics, such as human capital, resource endowment, and environmental regulation, on FDI-induced convergence/divergence. Our study on 256 Chinese prefectures finds that FDI helps prefectures with higher energy intensity to catch up with lower ones, which strengthens EIC. The impact of FDI on EIC varies depending on different local characteristics. Among all characteristics mentioned above, human capital and environmental regulation benefit the convergence-driving effect of FDI, while this effect is hindered by resource endowment. More comprehensive and detailed policies are recommended to address energy intensity gaps in China.