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Effect of foreign direct investment on firms' pollution intensity: evidence from a natural experiment in China

Published online by Cambridge University Press:  02 April 2024

Xuefeng Wang Open the ORCID record for Xuefeng Wang [Opens in a new window]  and
Haiyun Liu
Xuefeng Wang
Affiliation:
Institute for Advanced Studies in Finance and Economics, Hubei University of Economics, Wuhan, China
Haiyun Liu*
Affiliation:
School of Economics, Huazhong University of Science and Technology, Wuhan, People's Republic of China
*
*Corresponding author: Haiyun Liu; Email: lhaiyun@hust.edu.cn
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Abstract

This paper examines a causal relationship between foreign direct investment (FDI) and firms' pollution intensity by exploiting the policy of China's FDI access relaxation in 2002. The result shows that FDI leads to a significant reduction in firms' pollution intensity. The mechanism tests find that FDI reduces pollution intensity by increasing firms' productivity, pollution management abilities, and the output of lightly polluting firms. The effect primarily acts on firms in lightly polluting industries and firms in the eastern region. The findings support the pollution halo hypothesis and provide implications for developing countries like China by evaluating the effectiveness of policies to attract FDI.

Keywords

FDI access relaxationFDIfirm levelpollution intensity

JEL classification

Q56: Environment and Development • Environment and Trade • Sustainability • Environmental Accounts and Accounting • Environmental Equity • Population Growth F21: International Investment • Long-Term Capital Movements
Type
Research Article
Information
Environment and Development Economics , First View , pp. 1 - 20
Copyright
Copyright © The Author(s), 2024. Published by Cambridge University Press

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