Pollution heaven or pollution halo? Assessing the role of heterogeneous environmental regulation in the impact of foreign direct investment on green economic efficiency.

Abstract

As the main engine of the global economy, China has been attracting increasing foreign direct investment (FDI) since the 1980s. The frequent occurrence of pollution incidents by multinational companies and the continuous deterioration of the environment have prompted China to attach importance to environmental regulations and attempt to avoid the potential pollution heaven effect of FDI on green development. To assess the effectiveness of these environmental regulations, this paper investigates the moderating effect of environmental regulation, in particular, the heterogeneous environmental regulatory tools, on the relationship between FDI and green economic efficiency. In addition, the spatial performance of these moderating effects is examined through the spatial Durbin model (SDM), using China's provincial panel data from 2004 to 2018. The results show that environmental regulation has an overall positive moderating effect, exacerbating the pollution heaven effect of FDI on green economic efficiency. In the meantime, the moderating effects of heterogeneous environmental regulations are obviously different; i.e., command-and-control and public-participation-based environmental regulations have positive moderating effects, while market-based environmental regulation has a negative moderating effect. In addition, in terms of spatial performance, the market-based environmental regulation has a positive spillover effect, thereby promoting green economic efficiency in surrounding regions, which is contrary to command-and-control and public-participation-based environmental regulations. Based on the above findings, this paper makes some recommendations for policymakers.