Are African Countries Used As Pollution Havens By China?

In environmental economics, pollution haven hypothesis assumes that when companies seek to invest, they will often look for countries with least stringent environmental regulations to minimize environmental compliance cost. Although numerous empirical studies have been done to test this hypothesis, previous literatures mostly treat developing countries as FDI inflow countries. This thesis treats China as a FDI outflow country and main objective of this thesis is to find out whether this hypothesis conforms to China’s investment in Africa or does this investment have pollution haven tendencies in Africa. In addition, this thesis examines China’s investment trends in Africa.We construct a fixed effects model to conduct our empirical study. We anticipate that both political and business factors have impacts on China’s investment in Africa. Investment with political factors often aims at promoting soft power, so this kind of investment is usually long term investment. We apply annual data and three years’aggregated data to our model in the hope to capture both business and political factors in investment. We construct a variable from WEF data to measure African countries’ overall environmental stringency. China’s investment flow data come from the Ministry of Commerce of PRC.From our study we have the following results.1. Big markets are more attractive for China’s investment, however in the short term investment is preferred in lower income countries while in the long term in high growth potential countries; 2. Mineral resource have significant positive impact on investment and in the long run natural gas also attract high investment; 3. Conforming to nonintervention policy, China tends to invest in countries with weak political institutions; 4. Although we cannot test pollution haven hypothesis directly, in 2005,2006 and 2007, compared with 2004, China significantly reduced its investment in countries with stringent environmental regulations.Based on empirical results this thesis also gives some policy recommendations to the governments. Despite all the efforts, there is certainly room for improvement in our data and econometric model. For example, due to data limitations, we cannot measure environmental regulations’ impact to investment directly. In the future we hope to work on these shortcomings to further improve our research quality.