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Distinguishing the Complex Effects of Foreign Direct Investment on Environmental Pollution: Evidence from China

Abstract:
We attempt to investigate how and when foreign direct investment (FDI) impacts different types of environmental pollution in host countries. Using provincial data from China between 1995 and 2015, we find that FDI mitigates air pollution, yet it has insignificant effect on water and solid pollution. We further reveal that it is the combination of the technology, scale and structure effects that jointly determines the impact of FDI on environmental pollution. Among them, the technology effect takes the most dominant role, followed by the scale effect and structure effect. In addition, by considering the time effect on environmental policy change, we suggest that the pollution halo effect mainly occurs after air pollution policy revision. Our findings provide insight on the complex mechanisms and theoretical boundary of FDI on different types of environmental pollutants.

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Keywords: Foreign Direct Investment (FDI), Environmental Pollution, Pollution Haven argument, Pollution Halo argument, China

DOI: 10.5547/01956574.43.4.jche

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Published in Volume 43, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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