The role of OFDI in home-country pollution: insights from LMDI and 3SLS approaches

Abstract

Under the global climate crisis, harnessing investment for sustainable development is a practical and effective measure for international society. Based on the logarithmic mean Divisia index (LMDI) decomposition and three-stage least squares (3SLS) structural approaches, this study explores the home-country pollution reduction effect of Chinese OFDI activities using the city-level panel data from 2007 to 2019. The findings of this study indicate that (1) China has made a remarkable achievement in PM2.5 pollution reduction and governance, especially from the year 2012. (2) The OFDI activities can significantly decrease the home-country PM 2.5 pollution. With every 1% increase in OFDI flows, the overall pollution level will decrease by 0.76%. (3) Compared with the scale mechanism, the technology and composition mechanism effects of OFDI flows are more evident in addressing the home-country PM 2.5 pollution. With several related policy implications, this study may fill the lacuna of how to play the role of OFDI activities in the home country, thus promoting sustainable development in the next stage.