Location choice of FDI firms and environmental regulation reforms in China

Abstract

By examining the data on 13,663 newly established FDI firms and the environmental regulation reforms between 2000 and 2010, this paper studies whether foreign investors in China exhibit pollution haven behavior. Our analyses indicate that fewer FDI firms locate in provinces with more stringent environmental regulations (i.e., with higher pollution levy rates). Consistent results are found when we examine the individual firm’s location choice decision. We further find that firms’ location patterns respond to the changes in environmental regulations. In particular, their pollution haven behavior becomes more significant when the changes bring greater inter-provincial differences in environmental stringency.