The Impact Of FDI Inflow On Regional Pollution Emission

Since the reform and opening up policies of the 1970s, China has attracted more and more FDI inflow, with a particularly rapid growth in the past 15 years. The FDI inflow, while promoting the economic growth of various regions, it also simultaneously causes various environment problems. Environmental effects in receiving countries caused by FDI have become a hot topic of discussion. Much controversy is sparked over the phenomenon of developed countries transferring their "dirty" industries to developing countries, including the proposition of the "pollution haven hypothesis," and the Environment Kuznets Curve. Although many Chinese scholars also study this topic, there is no general agreement on the environmental effects of FDI in the receiving countries.This paper uses provincial panel data from 1997 to 2011 from 29 provinces and municipalities in China, dividing China into three regions based on geographic characteristics:the eastern, central and western regions. SO2 emission data will be used to measure the pollution emission levels. The explanatory variables are FDI, GDP per capita, and second industry output divided by GDP.Based on the regression results, this paper concludes that FDI inflow helps to improve the environmental conditions in the eastern region; aggravates the environmental problems in the central region; and has an insignificant impact on the environment in the western region.The reasons for such a phenomenon are as follows:first, most FDI is concentrated in the eastern region, and thus the FDI’s impact on the eastern region is more significant. Second, FDI mainly goes to the light industry or to the service industry in the eastern region. Given the eastern region’s higher quality of education among its population, and its market economy and infrastructure development, the eastern region also attracts more FDI with high-tech and green industries. In the central region, however, FDI goes to more pollution-heavy sectors. In the western region, FDI inflow is overall much less compared to that of other regions. Because of the underdevelopment of the western region, many foreign corporations are unwilling to invest there. In summary, the FDI’s impact on the regional environment is closely related with the economic and social conditions of a region.Based on the regression results, policies should be implemented to improve regional social and economic conditions in order to reverse FDI’s negative impact on the environment. These policies are even more crucial to the central and western regions, where the economy is less developed. In these areas, the infrastructure and population quality also remains at a low level. FDI in high-tech and green industries requires better social and economic conditions in the investment destination. By improving the economic conditions, population quality and the market environment in the central and western regions, high-tech and green industry FDI will increase, and thus local environment problems will lessen.