Abstract
This research investigates the interaction effect between corruption and foreign direct investment (FDI) on environmental pollution by applying the spatial econometric model to the panel data of China’s 29 provinces from 1994 to 2015 and analyzes the differences between China’s eastern, central and western regions. Results show that (a) FDI inflow deteriorates the environmental quality, validating the pollution haven hypothesis (PHH); (b) by weakening the environmental standards, corruption enables the inflow of low-quality FDI, weakens the spillover effect of FDI and indirectly causes further environmental pollution; (c) the interaction effect between corruption and FDI on environmental pollution is less significant in the eastern region than in the central and western regions.
Highlights
foreign direct investment (FDI) inflow into China has been increasing since the reform and opening-up, a growth from the utilized FDI of a mere 1.96 billion US dollars in 1985 to 134.97 billion US dollars in 2018, a 69-times increase or 20% annual growth
If corruption is more serious among the officials, low-quality and environmental unfriendly FDI could enter the country by bribing, further exacerbating the environmental pollution, i.e., the vicious circle between corruption and pollution caused by FDI
Before the spatial econometric analyses, it is necessary to test whether environmental pollution in different provinces has spatial autocorrelation
Summary
FDI inflow into China has been increasing since the reform and opening-up, a growth from the utilized FDI of a mere 1.96 billion US dollars in 1985 to 134.97 billion US dollars in 2018, a 69-times increase or 20% annual growth. An accompanying side effect of the reform, opening-up and FDI inflow is the rampant environmental pollution. The environmental pollution caused by FDI inflow is called the “pollution haven” phenomenon. This is because some enterprises from developed countries cannot fulfill the stringent environmental regulations and seek large-scale cost reduction by adopting high-pollution technologies in developing countries. FDI flows into developing countries with low environmental standards or even no environmental regulations and causes pollution problems. It should be noted that, when corruption is less rampant among government officials in a developing country, environmental regulations can be sufficiently carried out; FDI usually fulfills the corresponding regulations of the host country. The aforementioned analysis indicates that FDI may be the main culprit of pollution emissions, including chemical oxygen demand (COD) in industrial wastewater, sulfur dioxide and
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