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Environmental regulation and outward foreign direct investment: Evidence from China

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  • Dong, Yan
  • Tian, Jinhuan
  • Wen, Qiang

Abstract

This paper explores the impact of environmental regulation (ER) on outward foreign direct investment (FDI) flows in China. During the period from 2013 to 2015, all Chinese cities were required to join a nationwide automatic air quality monitoring network in batches, and this policy exogenously raised local environmental regulation. This unique policy implemented full coverage through a staggered adoption, which motivates this paper to apply an event study approach to identify the treatment effect of stringent environmental regulation. Based on a city-year level capital outflows dataset constructed from the fDi Markets database, we obtain three main findings: (1) environmental regulation significantly stimulates outward FDI flows; (2) this promoting effect centers on polluting industries; and (3) these ER-induced FDI outflows are mainly directed toward countries with weaker environmental protection and with a closer geographic and cultural distance to the home country. These results together provide a snapshot confirming the classical “pollution haven hypothesis”.

Suggested Citation

  • Dong, Yan & Tian, Jinhuan & Wen, Qiang, 2022. "Environmental regulation and outward foreign direct investment: Evidence from China," China Economic Review, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:chieco:v:76:y:2022:i:c:s1043951x22001353
    DOI: 10.1016/j.chieco.2022.101877
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    Cited by:

    1. Qian Zhao & Chi-Wei Su, 2023. "The Nexus Between Air Pollution and Outward Foreign Direct Investment," SAGE Open, , vol. 13(1), pages 21582440221, January.

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    More about this item

    Keywords

    Capital outflows; Environmental regulation; Geographic proximity; Cultural proximity; Event study;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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