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The spatial correlation and interaction between environmental regulation and foreign direct investment

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Abstract

This paper uses spatial simultaneous equation models to analyze the two-way mechanism between environmental regulation and foreign direct investment (FDI). The results, based on data from 285 cities in China from 2003 to 2014, show the following. (1) Not only does environmental regulation have a significant impact on the location choice of FDI, but FDI tends to flow to a city with more relaxed environmental regulation. Environmental regulation can also trigger the near transfer effect of FDI. (2) FDI has a significant spatial spillover effect and this spatial spillover effect has an important impact on FDI and environmental regulation in a particular city. (3) Although multinationals choose a city with more relaxed environmental regulations when they invest in China, FDI inflows have increased both the number and severity of local environmental regulations, indicating that the “pollution haven” hypothesis does not hold in China. (4) Environmental regulation has a significant spatial spillover effect, and this spatial spillover effect has an important impact on both environmental regulation and FDI in cities. In China, there is also a local competitive effect of environmental regulation, albeit with significant regional differences.

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Acknowledgements

The work in this paper was supported by the Major project of the national social science foundation (Grant No. 16ZDA047), the National Natural Science Foundation of China (Grant No. 71803087), the Report Project on the Development of Philosophy and Social Sciences of China’s Ministry of Education (Grant No. 13JBG004), the Jiangsu Social Science Foundation (Grant No. 17EYC010), the Jiangsu project of philosophy and social science foundation (Grant No. 2017SJB0152), the Top-notch Academic Programs Project of Jiangsu Higher Education Institutions and the Project Funded by the Priority Academic Program Development of Jiangsu Higher Education Institutions.

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  1. China Institute of Manufacturing Development, Nanjing University of Information Science and Technology, Nanjing, 210044, China

    Zhonghua Cheng, Lianshui Li & Jun Liu

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  1. Zhonghua Cheng
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  2. Lianshui Li
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  3. Jun Liu
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Correspondence to Zhonghua Cheng.

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Cheng, Z., Li, L. & Liu, J. The spatial correlation and interaction between environmental regulation and foreign direct investment. J Regul Econ 54, 124–146 (2018). https://doi.org/10.1007/s11149-018-9366-x

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