The green spillover effect of the inward foreign direct investment: Market versus innovation

Abstract

Little work has focused on whether or under which conditions foreign direct investment (FDI) can spill cleaner-production technologies. To explore the complicated effects of FDI's technical spillover on the green innovation effort of host countries, this paper develops a multi-stage decision-making model in which abatement treatments of firms are described. It is found that marketization level and innovation capacity of the host country are two key factors impacting FDI's green spillovers. The results show there are preconditions in terms of green spillovers, i.e., FDI can improve or has no impact on the environmental performance of local firms under different conditions. Moreover, there are double threshold effects: the degree of FDI's green spillover varies with the different levels of the two threshold variables of marketization and innovation capacity. An increase in innovation capacity always motivates cleaner-technology diffusion in host countries. In addition, a moderate tax system is conducive to the green spillovers of FDI. This paper provides a theoretical support for the pollution halo hypothesis that FDI can promote cleaner development of host countries. Finally, from a perspective of cleaner-production practice, the policy implications are discussed to make production cleaner and ensure environmental sustainability.