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Does Air Pollution Crowd Out Foreign Direct Investment Inflows? Evidence from a Quasi-natural Experiment in China

Author

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  • Weibing Li

    (Huazhong University of Science and Technology)

  • Kaixia Zhang

    (Huazhong University of Science and Technology)

Abstract

This study investigates whether air pollution crowds out foreign direct investment in China. We use a regression discontinuity design based on the lower air pollution to the South of the Qinling Mountains–Huai River line because the government did not develop coal-based central heating networks there, contrary to north of the line. We observe that for every 1% increase in PM2.5 concentration, foreign direct investment flows decrease by 0.393%, and foreign direct investment stocks decrease by 0.015%. By tracing the potential mechanisms, we find that air pollution may exert a negative impact on foreign direct investment inflows through its impacts on the health risks of the labor force and health insurance spending of foreign firms.

Suggested Citation

  • Weibing Li & Kaixia Zhang, 2019. "Does Air Pollution Crowd Out Foreign Direct Investment Inflows? Evidence from a Quasi-natural Experiment in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 1387-1414, August.
    • Handle: RePEc:kap:enreec:v:73:y:2019:i:4:d:10.1007_s10640-019-00329-8
    DOI: 10.1007/s10640-019-00329-8
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    Cited by:

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    2. Weibing Li & Siyuan Chen & Kaixia Zhang, 2023. "Responsible Behavior of Irresponsible Companies: Air Pollution and Charitable Donations of Polluting Companies," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(4), pages 90-119, July.
    3. Fagbemi, Fisayo & Oke, Dorcas Funmilola, 2024. "Climate change vulnerability-foreign direct investment linkage: Why climate change preparedness matters in Sub-Saharan Africa," Research in Economics, Elsevier, vol. 78(1), pages 52-60.
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    More about this item

    Keywords

    Huai River policy; Air pollution; Foreign direct investment; Regression discontinuity; Crowding-out effect; China;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment

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