Research On The Relationship Between Environmental Regulation And Unbalanced Growth Of FDI

With the development of reform and opening-up policy as well as entry intoWTO, the absolute quantity of absorbing foreign direct investment(FDI) in ourcountry has increased successionally in recent years.However, a large influx offoreign capital has also brought a series of environmental problems. In order tomaximize profits, the foreign-funded enterprises enhance internationalcompetitiveness by transferring pollution-intensive industries into developingcountries with relatively loose environmental regulation. Under the dual pressures ofeconomic development and political advancement, local governments introduce somelow-skilled, high-pollution foreign enterprises at the cost of the environment, whichaggravated the fragile ecological environment. In recent years, the government s haveinvested a lot of money for pollution control based on the concept of sustainabledevelopment, and have formulated a series of policies to strengthen environmentalregulation. However, compared with developed countries, China’s environmentalprotection awareness is not strong, and its law enforcement of environmentalprotection is inadequate. All these lead to lower environmental regulation, so therelationship between environmental regulation and FDI location has caused a lot ofwide attention. Based on the fact that FDI grows unbalanced, this articlecomprehensively analyses the influence of environmental regulation on unbalancedgrowth of FDI. The study is mainly from five points which include the regionaldistribution of FDI, industry structure, investment ways, source structure and theimprovement of technology. And this paper attempts to answer the following issues:does the level of environmental regulation have significant impact on FDI location? Ifpresent, what are specific channels of influence or impact mechanism? Doesenvironmental regulation cause unbalanced growth of FDI in regions, industries,sources, the use of foreign capital and technological progress? Will stringentenvironmental regulation stimulate foreign-funded enterprises to make up forcompliance costs through technological innovation? To answer above questions, thispaper makes deep discussions.Since there are close market and trade linkages between Chinese provinces,especially between adjacent provinces, this paper builds a spatial econometric modelincluding third-party effects to study how local and circumjacent environmental regulation influent the inflow of FDI by affecting FDI’ production cost and innovationcapacity.The results show that the environmental regulation has an U sharp influenceon FDI inflows,and the inflection point in eastern areas is higher than central andwestern areas.At present, the level of environmental regulation in central and westernareas have already reached the right part of the U curve.Besides, circumjacentenvironmental regulation has an inverse U curve influence on FDI inflows,but itsinflection point is much lower than that in local areas.There is an obvious spatialthird-party effects on FDI inflows,and these effects have different characteristics withdifferent areas,which more comprehensively explain the factors that affect regionaldistribution of FDI in China.And when researching the relationship between environmental regulation andunbalanced growth of FDI in different sectors,this paper attempts to build atheoretical model including three factors and two products, and makes environment asa new factor to analyse effects of marginal costs rise caused by environmentalregulation on industry choice of FDI.On this basis,we use35manufacturing-sectorspanel data in China to empirically research the influence of environmental regulationon FDI inflows.The results show that environmental regulation has an U sharpinfluence on industry choice of FDI.So far, most industries have stridden across theinflection point of the U curve, and the first-mover advantage and innovationcompensation effect brought by environmental regulation have taken the lead. Besides,the inflows of FDI in manufacturing sectors is positively affected by the rise of wagelevel,products diversity,technology level as well as profit margin,but their affectionhas slight differences between clean and polluting industries.Finally, there is asignificant correlation between the lagged and current FDI inflows.The stock of FDIin previous period will increase foreign investments by demonstration effects andpush effects, and it also has an obvious characteristic of path-dependent.Considering greenfield investment and Cross-border Mergers&Acquisitionsface different risks and expected return under environmental regulation,f oreignenterprises will make different production decisions.Therefore,in this paper,weattempt to study their unbalanced growth by establishing a foreign investment modelunder semi-closed conditions,and empirically estimate the effects of environmentalregulation on FDI under the different investment mode.The theoretical and empiricalresults show that,if the level of government environmental regulation is higher,theexpected return by greenfield investment is less than Cross-border Mergers&Acquisitions under the equal investment conditions.In addition, there is a U-shaped curve relationship between environmental regulation and FDI,so the government’senvironmental regulatory action must be compatible with other economic policies inorder to make the structure of foreign investment in China more reasonable.Under theconditions of stringent environmental regulation, improvement of infrastructure costdoes increase the risk of greenfield investment.At present,foreign investment in China possess the characteristic of largenumbers and fast growth and wide source.FDI from different sources has differentsensitivity to environment regulations, so we also examine the influences ofenvironmental regulation on different sources of FDI.The empirical results showthat the strengthening of environmental regulation in initial stage of pollutinginvestment increases investors’ costs and reduces their income, which leads to aslowing pace of FDI growth. And as environmental regulation continuing to bestrengthened, the non-polluting foreign investment is gradually attracted. Thecountries whose investment in China grow faster have some unique characteristics,such as greater volume of trade with China, shorter geographical distance, longerpolitical dealings, more investment in China’s neighboring countries and fasterappreciation of nation currency. In addition, when the sample divided into two groups,the empirical estimation shows that FDI from developing countries caused byenvironmental regulation is much larger than from developed countries, and thesensitivity to environmental regulation of developing countries’ investment is higherthan that of developed countries. Compared to developing countries, the concentrationeffect of developed countries’ FDI is more pronounced, while the scale of thecountry’s economy and its distance from China less restricted its foreign investment.Some research results have showed that stringent environmental regulation willincrease the barriers to the entry of foreign-funded enterprises,and also affect thedistribution of foreign-funded enterprises stationed in the industry and marketconcentration.FDI takes overseas investment as a key channel for access to knowledgespillover,so will stringent regulation improve the technological advances offoreign-funded enterprises by affecting the entry of FDI?Based on the panel data of35manufacturing sectors in China during2001-2010,this paper decomposes technologyprogress of FDI according to Malmquist index, and incorporates environmentalregulation and FDI innovation into econometric model to empirically test the effectsof environmental regulation on FDI technology progress,mainly studying howenvironmental regulation indirectly promotes FDI technology progress by technologyintroduction,innovation and reverse technology spillover.The results show that the increase of total factor productivity mainly comes from technology progress.Environmental regulation improves its technology progress by some indirect channelssuch as intensifying technology transfer of FDI or innovation incentive.But differenttechnique attributes make regulation effects more obvious in higher R&D,Higherconcentration and Labour-intensive industries.Among these,FDI in higher R&Dobviously promotes input-oriented and efficiency-oriented technology progress.Thereverse technology spillover effect of FDI is significantly negative,and this negativeeffect is more obvious in higher concentration and lower capital-inputindustries.Finally,this paper puts forward some relevant policy recommendations onthe basis of the conclusions of this study.