FDI and environmental regulations in China

Abstract

This paper uses provincial socioeconomic and environmental data and investigates whether there exists an intra-county pollution haven effect for China. We examine whether differences in the stringency of environmental regulations affect the choice of location for FDI in China. We use a five-year panel dataset for 30 provinces in China that includes three measures of environmental regulations, which vary across time and province, and a significant number of control variables including measures of agglomeration and factor abundance. We control for unobserved heterogeneity by using a feasible generalised least square estimator. Our results suggest that environmental stringency has a significant and negative effect on FDI, leading us to conclude that, ceteris paribus, FDI prefers to locate into regions with relatively weak environmental regulations. This provides some support for the existence of a pollution haven within China.

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