Carbon emissions regulations and FDI inflow: moderating effects of bank credit availability and fiscal capacity for China's prefecture-level cities

This study investigates the effect of carbon emissions regulations on FDI inflow and the moderating effects of bank credit availability and fiscal capacity. According to the “pollution haven” hypothesis (PHH), foreign direct investment (FDI) tends to move to countries/regions with less stringent environmental regulations. Consistent with the PHH, this study finds that stringency of carbon emissions regulations is negatively associated with FDI inflow for Chinese prefectural-level cities during 2004–2018. This study also finds that bank credit availability and local government fiscal capacity mitigate the negative association between carbon emissions regulations and FDI. The results suggest that Chinese cities with low bank credit availability are more likely to relax carbon emissions regulations to attract FDI. Moreover, Chinese cities with high fiscal capacity can use their fiscal expenditures to minimize the negative effect of strict carbon emissions regulations on FDI. The findings imply that China's central government can help the cities achieve sustainable development by facilitating bank financing and providing fiscal support.