Temperature anomalies and foreign direct investment: City-level evidence from China

Abstract

We use temperature anomalies, calculated as temperatures deviating from historical average temperatures, as proxies of climate change, and investigate the impact of climate change on foreign direct investment (FDI) in Chinese prefecture-level cities. The empirical results indicate that increases in temperature anomalies have a significant and negative cumulative effect on FDI, and that the impact lasts for only two years. Although the impact is not heterogeneous between rich and poor cities, FDI in rich cities responds more quickly to temperature anomalies, and the impact lasts longer in rich cities. We provide the following two possible channels through which temperature anomalies affect FDI: economic development and demographics. Our results are robust to a series of tests. We provide evidence of the relationship between climate change and economic activities from a new perspective of foreign investment, highlight the influential channels and confirm the role of climate change in determining FDI locations.