Part Of The Problem Or Part Of The Solution? Impact Of Foreign Investment On Environmental Governance In China

The intensifying globalization and economic integration are accelerating theincrease of foreign direct investment (FDI) flows across national borders. This thesisseeks to find the impact of FDI on environmental governance in China—whether ornot foreign investment serves as part of the solution or part of the problem in localenvironmental governance. The “race to the bottom” theory believes a downwardpressure is created by foreign invested enterprises (FIEs) towards the weakening ofenvironmental regulations, while the “race to the top” or “trading up” theory arguesthat FIEs can generate an upward boost towards the strengthening of environmentalgovernance. The previous literature studying on the relationship between FDI andenvironmental governance provides theoretical guidance, but neither of thesearguments has been rigorously tested in developing countries like China.This thesis tests the plausibility of the “race to the top” theory by studying therole of FIE and its interaction with domestic firms and government. It finds that bycomplying with China’s environmental regulations and even higher ones and throughinteraction process with domestic firms and environmental regulators, FIEs in Chinaare able to exert upward pressure on environmental governance to trigger a “race tothe top” effect. The hypothesis is further tested in a case study of British Petroleumoperations in China. But the upward ratcheting of environmental standards isconditional on the milieu of foreign investment which reflects Chinese domesticenvironmental awareness and political preferences. FDI attracted to jurisdictions thatare desperate for foreign capital when escaping from stringent environmentalgovernance creates the worst condition variable that is most likely to trigger a“regulatory chill” or even “race to the bottom” effect.