Environmental regulation and inward foreign direct investment: Evidence from the eleventh Five‐Year Plan in China. (10th June 2021)

• Record Type: Journal Article
• Authors: Li, Yanyun; Lin, Faqin; Wang, Wenxiao
• Editors: Claus, Iris
• Is Part Of: Journal of economic surveys. Volume 36:Number 3(2022)
• Page Start: 684
• Page End: 707
• Publication Date: 2021-06-10
• Subjects: China -- difference‐in‐difference‐in‐differences estimation -- environmental regulation -- inward foreign direct investment -- pollution haven effect; Economics -- Periodicals; 330
• DOI: 10.1111/joes.12439
• Languages: English
• ISSNs: 0950-0804

Abstract

Abstract: This paper investigates whether environmental regulations affect inward foreign direct investment (FDI). The identification strategy uses the reduction target policy for air pollutants during eleventh Five‐Year Plan period implemented by the Chinese government in 2006. Our difference‐in‐difference‐in‐differences estimation employs three‐dimension of variations; prefecture (i.e., high target prefectures vs. low target prefectures), industry (more polluting industries relative to less polluting ones), and year (i.e., before and after 2005). We find that tougher environmental regulations lead to less inward FDI through increasing the probability of exit and reducing the probability of entry of foreign invested enterprises. Mechanism analysis shows that foreign invested enterprises with relatively low productivity demonstrate strong negative response. This allocation of resource improves industry productivity.