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Green regulation, trade friendliness, and local policy adaptation

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  • Du, Xinming
  • Qin, Yu
  • Xie, Yu

Abstract

This paper examines the impacts of national policies on local policy formulation by studying the interplay between a top-down environmental regulation and the local Foreign Direct Investment (FDI) policies. We compiled a database of prefecture-level FDI policies in China spanning four decades and leveraged the Two Control Zones (TCZ) policy that designated some prefectures for pollution abatement. A difference-in-differences analysis shows that the TCZ designated cities formulated more friendly FDI policies after the TCZ policy. Mechanism analyses suggest that local governments loosen FDI regulations to offset economic costs of environmental regulation and attain political promotion.

Suggested Citation

  • Du, Xinming & Qin, Yu & Xie, Yu, 2026. "Green regulation, trade friendliness, and local policy adaptation," Journal of Environmental Economics and Management, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:jeeman:v:135:y:2026:i:c:s0095069625001469
    DOI: 10.1016/j.jeem.2025.103262
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    Keywords

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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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