Impact of host countries' environmental regulations along the Belt and Road Initiative on China's Outward Foreign Direct Investment

Abstract

This paper makes use of the panel data of China's direct investment in 61 countries along the ‘Belt and Road' from 2006 to 2016. Using the investment gravity model, we first carry out the total data regression, then the sample data regression based on the national income, the environmental reg- ulation intensity and the district position. The study found that, as far as the overall sample is con- cerned, the national environmental regulation along the ‘Belt and Road' has a significant inhibitory effect on China's Outward Foreign Direct Investment (OFDI), and the countries along the line are grouped according to income levels. Environmental regulations vary according to the differences in national income levels: environmental regulations in high income and intermediate-high income countries have a notable negative correlation with the OFDI of China, while environmental regula- tions in low-and middle-income countries have no significant impact on China's OFDI. According to the intensity of environmental regulation, the countries along the ‘Belt and Road' are grouped. The empirical results show that China's OFDI was significantly inhibited by countries whose national environmental regulations are higher than the Environmental Performance Index (EPI), while China's OFDI was not affected by the countries whose national environmental regulations are lower than the EPI. According to the different regional groupings of the host country, it was found that the environmental regulations of European countries and West Asian countries significantly inhibited China's OFDI, while the environmental regulations of the Middle East and North Africa and East Asian countries had no significant impact on China's OFDI.
 Some other important factors affecting China's OFDI should be taken into consideration, includ- ing the scale of the economy in the investment home country, the host country's economic level, strategic resources, infrastructure, government regulation, and bilateral trade tightness. Except for the government regulation level, which has an inhibitory effect on China's OFDI, the others have a strong promoting effect. This is consistent with the conclusions drawn by Qiu Qiang [2018]. The role of natural resources is not significant, indicating that China has insufficient incentives to natural resources along the ‘Belt and Road' countries.
 Finally, from the perspective of the government and enterprises, policy recommendations are pro- posed relevant to China's OFDI along the ‘Belt and Road'. The government should actively collect the measurement data of the host country's environmental regulations, carry out investment grading according to the strength of the environmental regulations and formulate different investment strat- egies accordingly. Chinese companies must pay attention to technology and innovation capabilities, which is conducive to reducing the extrusion of OFDI with similar technology levels.