Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China

Abstract

One of the most contentious debates today is whether pollution-intensive industries from rich countries relocate to poor countries with weaker environmental standards, turning them into "pollution havens." Empirical studies to date show little evidence to support the pollution haven hypothesis, but suffer potentially from omitted variable bias, specification, and measurement errors. This paper estimates the strength of pollution-haven behavior by examining the location choices of equity joint venture (EJV) projects in China. We derive a location choice model from a theoretical framework that incorporates the firm's production and abatement decision, agglomeration and factor abundance. We estimate conditional logit and nested logit models using new data sets containing information on a sample of EJV projects, effective environmental levies on water pollution, and estimates of Chinese pollution-intensity for 3-digit ISIC industries. Results from 2,886 manufacturing joint venture projects during 1993-96 show EJVs from all source countries go into provinces with high concentrations of foreign investment, relatively abundant stocks of skilled workers, concentrations of potential local suppliers, special incentives, and less state ownership. Environmental stringency does affect location choice, but not as expected. Low environmental levies are a significant attraction only for joint ventures in highly-polluting industries with partners from Hong Kong, Macao, and Taiwan. In contrast, joint ventures with partners from OECD sources are not attracted by low environmental levies, regardless of the pollution intensity of the industry. We discuss the likely role of technological differences in explaining these results.

Foreign Direct Investment and Environmental Pollution: New Evidence from China

“…He (2006) estimated that with 1% increase in FDI capital stock, then industrial S 2 emission will increase by 0.098%, therefore the empirical conclusion in this paper provided convincing evidence for pollution haven hypothesis. Dean et al (2009) estimated conditional and nested logit model and further indicate that FDI mainly from OECD countries in highly polluting industries significantly decreases in provinces with relatively stringent pollution regulation.…”

Does Environmental Policy Reduce Enterprise Innovation?—Evidence from China

“…With the gradual improvement of micro database construction of China, environmental issues have attracted more and more global scholars' attention (Dean et [34][35][36][37]. In an earlier article, Dean et al (2009) studied the impact of China's environmental policy regulation on foreign investment [34]; Hering and Poncet (2013) use the China's "two control zones" environmental policy, using quasi-natural experiments to study the impact of this policy on enterprise profit, cost, and external direct investment. Results show that strict environmental regulation will increase corporate profits and reduce foreign capital inflows, and this causal effect is greater in countries with lower levels of environmental regulation [33].…”

A fragmented environmental state? Analysing spatial compliance patterns for the case of transparency legislation in China

“…The Environmental Kuznets Curve (Grossman and Krueger 1991) represents a well-documented concept that establishes a connection between economic development and environmental protection. Several empirical studies on China confirm this claim (Dean et al 2009;Bu et al 2013;Shen 2008;Zhang and Fu 2008). We, therefore, use per capita gdp as a control variable in our baseline model.…”