Environmental Regulation and Foreign Direct Investment: Evidence from China’s Eleventh and Twelfth Five-Year Plans

Yuqing Ge, Yucai Hu and Shenggang Ren
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Yuqing Ge: School of Business, Central South University, Changsha 410083, China
Yucai Hu: School of Business, Central South University, Changsha 410083, China
Shenggang Ren: School of Business, Central South University, Changsha 410083, China

Sustainability, 2020, vol. 12, issue 6, 1-18

Abstract: This paper investigates environmental regulation and its impact on inward foreign direct investment (FDI) in developing countries. Based on the Chinese province-industry-level panel data in the period 2001 to 2015, we use a difference-in-difference-in-differences (DDD) model to evaluate pollution haven behavior in the context of China’s 11th and 12th Five-Year Plans SO 2 emissions reduction policy. The results show that the policy leads to fewer FDI inflows to its highly-polluting industries in provinces with tougher pollution reduction targets. In addition, the environmental policy has significantly inhibited FDI inflows in provinces with stricter environmental enforcement, while investment in provinces with worse environmental enforcement is insensitive to environmental policy. These findings are consistent with pollution haven behavior. In contrast, FDI in industries with high levels of technology is not significantly influenced by the policy, whereas the FDI in industries with low levels of technology shows a negative response to environmental policy. This is overall evidence confirming a pollution haven effect (PHE), although technology differences could alleviate the negative effects of environmental regulation on inward FDI.

Keywords: environmental regulation; 11th Five-Year Plan and 12th Five-Year Plan; pollution haven effect; FDI (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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