Study on the environmental effects of two-way foreign direct investment in China’s service industry

Abstract

A mathematical model was built in this paper to divide the environmental effects of Foreign Direct Investment (FDI) in the service sector in terms of scale effect, structural effect and technical effect. Also, inbound FDI (IFDI) and outbound FDI (OFDI) were put under the same research framework, where the effects of two-way FDI on the emissions of SO2 and chemical oxygen demand (COD) were empirically tested with the 2004-2016 panel data of China’s service sector. The results show that IFDI in the service sector has significantly reduced China’s pollution emissions and improved environmental quality. This is mainly due to the positive technical and structural effects. OFDI in the service sector exhibits different responses to different pollution emission indexes. When there are both IFDI and OFDI in the service sector, SO2 emissions are suppressed to a certain extent, whereas COD emissions are not effectively controlled. In addition, the increased service output scale, per-capita capital stock and R&D input also have varying effects on environmental pollution in China.