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The spatial correlation and interaction between environmental regulation and foreign direct investment

Zhonghua Cheng (), Lianshui Li and Jun Liu
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Zhonghua Cheng: Nanjing University of Information Science and Technology
Lianshui Li: Nanjing University of Information Science and Technology
Jun Liu: Nanjing University of Information Science and Technology

Journal of Regulatory Economics, 2018, vol. 54, issue 2, 124-146

Abstract: Abstract This paper uses spatial simultaneous equation models to analyze the two-way mechanism between environmental regulation and foreign direct investment (FDI). The results, based on data from 285 cities in China from 2003 to 2014, show the following. (1) Not only does environmental regulation have a significant impact on the location choice of FDI, but FDI tends to flow to a city with more relaxed environmental regulation. Environmental regulation can also trigger the near transfer effect of FDI. (2) FDI has a significant spatial spillover effect and this spatial spillover effect has an important impact on FDI and environmental regulation in a particular city. (3) Although multinationals choose a city with more relaxed environmental regulations when they invest in China, FDI inflows have increased both the number and severity of local environmental regulations, indicating that the “pollution haven” hypothesis does not hold in China. (4) Environmental regulation has a significant spatial spillover effect, and this spatial spillover effect has an important impact on both environmental regulation and FDI in cities. In China, there is also a local competitive effect of environmental regulation, albeit with significant regional differences.

Keywords: Environmental regulation; Foreign direct investment; Interaction; Pollution haven; Regulation competition; Spatial spillover effect (search for similar items in EconPapers)
JEL-codes: C3 F6 Q5 (search for similar items in EconPapers)
Date: 2018
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