Non-linear effects of outward foreign direct investment on total factor energy efficiency in China

Abstract

China is experiencing rapid economic development where outward foreign direct investment (OFDI) ranked third globally in 2017. OFDI could affect energy efficiency in China through reverse technology spillover. However, few studies have studied the impact of OFDI on total factor energy efficiency (TFEE), notably on the non-linear relationships and potential threshold level of the variables that would impact non-linearity. A panel smooth transition regression (PSTR) model was developed to analyse the non-linear impact of OFDI (explaining variable) on TFEE (explained variable). The data from 30 provinces, municipalities and autonomous regions (except Tibet) in China from 2006 to 2017 were considered. Industrial structure, opening-up level and human capital were selected as the transition variables to analyse potential threshold levels on how OFDI would enhance TFEE. The PSTR modelling results show that increasing OFDI in China can improve TFEE where the relationship is non-linear. The thresholds for opening-up level, industrial structure and human capital are 36.11%, 37.59% and 8.33%. With the change of the industrial structure, opening-up level and the human capital, the effect of OFDI on TFEE transited slowly and smoothly between high and low regimes. The opening-up level in Fujian, Zhejiang, Tianjin, Jiangsu, Guangdong, Beijing, and Shanghai is above the threshold level. Most regions show the industrial structure and human capital levels above the threshold. This study shows the importance of developing a non-linear model to accurately evaluating the impact of OFDI in enhancing TFEE in China. The model enables policymakers to assess the thresholds of the transition variables to observe the positive effect of OFDI on TFEE.