Impact of industrial agglomeration on environmental pollution from perspective of foreign direct investment-a panel threshold analysis for Chinese provinces.

Abstract

In the course of China's rapid economic development, the coexistence of industrial development and dominant industrial agglomeration (AGG), along with growing environmental problems, has attracted widespread attention from scholars. Although the linear relationship between the two has been analyzed in depth in the research literature, a concomitant phenomenon, i.e., the gradual expansion in the scale of foreign direct investment (FDI), has been overlooked. By employing threshold panel regression model, this paper attempts to construct a theoretical model with embedded AGG and FDI, and incorporates other factors affecting environmental pollution (POL). For examining the mechanism of AGG on POL, we proposed a testable theoretical hypothesis, and conducted an empirical study by combining panel data of POL and AGG at the provincial level in China. The measurement index of a control variable was changed to check the robustness of our results, and the coefficient sign of each explanatory variable was not changed, confirming the robustness of main results. Overall, AGG improves regional POL, but the impact of FDI is stage-specific and roughly there are three stages. Specifically, the positive effect of AGG on POL is strong when FDI is at a low level. When the level of FDI crosses the first threshold and continues to rise, the positive effect of AGG on POL reaches its strongest; until the second threshold is crossed, the positive effect of AGG starts diminishing slowly. Concluding this, for promoting economic development and environmental protection in the region in parallel, government and enterprises should prioritize the increment in FDI, with an equalization of levels of AGG and FDI, in order to enhance the improvement effect of AGG on POL.