Role of foreign direct investment and fiscal decentralization on urban haze pollution in China

Abstract

Government management is the main tool to solve environmental pollution. Considering the unique fiscal decentralization institution in China, this paper investigates the effect of foreign direct investment (FDI) on urban haze pollution in China from the perspective of spatial econometrics. The Generalized Spatial Two Stage Least Squares (GS2SLS) method is employed to treat the spatial correlation of air pollution. Based on a panel dataset comprising 276 Chinese cities during 2004–2018, we find a positive effect of FDI on urban haze pollution. For one standard deviation increase in FDI, the average annual PM2.5 concentration increase by 1.5%, ceteris paribus. Evidence also suggests that this effect varies across regions with different levels of fiscal decentralization. Through the test of the moderating effect and the threshold effect, we found that the higher of the fiscal decentralization, the weaker of the impact of FDI on haze pollution. This study proposes a new solution for sustainable development: increasing the financial autonomy of local governments to restrain the attraction of non-cleaner investment.