Empirical Analysis For The Relation Of FDI, Environment Pollution And Environment Regulation In China’s Manufacturing Industry

Since the1978’s reform and opening up, China’s total foreign direct investments(FDI) has been increasing. It has great power in the forefront of global foreign capitalin recent years. Although FDI will bring capital from the host country and promoteeconomic development, it may also bring some negative effects. Especially, thosewho urgently require economic development then lower their environmental-controlstandards to attract foreign investment. So FDI will lead to a series of environmentalproblems. The hypothesis of pollution heaven believes that the differences ofenvironmental regulation have an important effect on FDI location distribution, andoverly strict environmental regulation will make polluted industries transfer to thecountries with less stringer environmental regulations. Therefore the country withlooser environmental control will change into "pollution heaven." As a developingcountry, does it mean that the entry of a large number of FDI into China will have anegative impact on the environment? Does the Relatively liberal environment attractFDI to flow into the pollution-intensive industries? Is it possible that we guide FDIinto the cleaner industry by implementing of strict environmental regulations,optimize the industrial structure, and finally achieve the target of synergydevelopment between FDI and the environment? This paper is based on a study ofthese issues.Based on the environmental Kuznets hypothesis and the FDI location choicetheory, this paper respectively establish models of the relationship of FDI andenvironmental pollution, environmental regulation and FDI. Panel data of China’smanufacturing industry segments from2001to2008is used in these models tomeasure the relationships. The conclusions are as follows: firstly, Foreign DirectInvestment has an impact on China’s economy by influencing the size, structure andtechnological progress. The increase of foreign investment not only expands the sizeof the economy which makes emissions increase in manufacturing, but also optimizesthe industrial structure and improves technological progress which reduces pollutionemissions in the manufacturing sector. The negative scale effect of FDI on theenvironment is greater than the positive structure effect and technical effects,therefore the total effect is negative. It means that FDI has brought Chinaenvironmental pollution. Secondly, in the short term, environmental regulation will increase the cost of the production, so it will have a negative effect on FDI. While inthe long term, it will promote enterprises to improve production technology andproduction processes and produce cleaner products to enable enterprises to increaseprofits, thus it will have a positive effect on FDI.China’s looser environmental regulation is an important factor of foreign directinvestment Although China has a certain "pollution haven" effect features, but it hasnot become one of the world’s disaster shelter. Based on those conclusions above,suggestions of how to coordinate FDI and environment are proposed.