The influence of FDI on air quality : an empirical study of four municipalities in China

Abstract

The past several decades have witnessed the prosperity of foreign direct investment (FDI) inflows into China. While enjoying the economic growth brought by FDI, people have questions about the environmental impact of FDI because of the decaying environment condition in China. This paper conducted detailed research on the relationship between FDI (especially industrial FDI) and air quality in the four municipalities (Beijing, Tianjin, Shanghai and Chongqing) in China. Using panel data of the four cities from 2005 to 2015, the author finds that FDI has a positive influence on pollution abatement, and this positive correlation is robust when different sets of control variables are employed. The positive effect is greater in the four cities than in the average national level. Findings support the Environment Kuznet Curve and prove that incomes in the four cities have surpassed the turning point. Three possible channels, which are spill-over effect, income effect and local endowment, are also discussed in this paper. Results in this paper suggest that to maximise the positive influence of FDI on environment protection, the host area should enhance local endowment, such as cultivating its human capital and extending its absorption capacity of high-quality FDI.