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Does Air Pollution Crowd Out Foreign Direct Investment Inflows? Evidence from a Quasi-natural Experiment in China

Weibing Li () and Kaixia Zhang ()
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Weibing Li: Huazhong University of Science and Technology
Kaixia Zhang: Huazhong University of Science and Technology

Environmental & Resource Economics, 2019, vol. 73, issue 4, 1387-1414

Abstract: Abstract This study investigates whether air pollution crowds out foreign direct investment in China. We use a regression discontinuity design based on the lower air pollution to the South of the Qinling Mountains–Huai River line because the government did not develop coal-based central heating networks there, contrary to north of the line. We observe that for every 1% increase in PM2.5 concentration, foreign direct investment flows decrease by 0.393%, and foreign direct investment stocks decrease by 0.015%. By tracing the potential mechanisms, we find that air pollution may exert a negative impact on foreign direct investment inflows through its impacts on the health risks of the labor force and health insurance spending of foreign firms.

Keywords: Huai River policy; Air pollution; Foreign direct investment; Regression discontinuity; Crowding-out effect; China (search for similar items in EconPapers)
JEL-codes: F21 Q53 Q56 P28 (search for similar items in EconPapers)
Date: 2019
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