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Foreign Direct Investment and Pollution Havens Hypothesis: Firm-Level Panel Data Evidence from China

Maoliang Bu (), Shuwen Zhai, Jie Zhang and Wenping Zheng

A chapter in Globalization and the Environment of China, 2014, vol. 14, pp 73-96 from Emerald Publishing Ltd

Abstract: Abstract The central debate on pollution havens concerns whether the level of environmental regulation in developing countries influences foreign investment location decisions. Most empirical studies are based on aggregate data, while micro-level evidence is relatively lacking in the literature. To fill this research gap, this paper tests for the existence of intracountry pollution havens in China by estimating the determinants of foreign investment flows based on a large firm-level panel dataset. Evidence from this study supports the existence of pollution havens within China in certain industries. However, the sensitivity of foreign investment to environmental regulation varies significantly across industries with different pollution characteristics. Furthermore, when the impact of government subsidies on foreign investment is accounted for, the results show that subsidies can compensate for pollution treatment costs in provinces with stricter environmental regulation.

Keywords: Foreign direct investment; environmental regulation; pollution haven; China; F18; Q56; O53 (search for similar items in EconPapers)
Date: 2014
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