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Heterogeneous impacts of environmental regulation on foreign direct investment: do environmental regulation affect FDI decisions?

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Abstract

The industry selection effect occurring from the impact of environmental regulation on foreign direct investment (FDI) in China is heterogeneous. Based on the extended game theory model, and by using panel data of 35 Chinese industries from 2005 to 2014, this study constructs a system of simultaneous equations to explore the dynamic effect of environmental regulation on FDI in terms of industry selection decisions. Specifically, three-stage least square analysis method (3SLS) of simultaneous equations is utilized to check robustness of the results under different standards. Results reveal that environmental regulation promotes the technological innovation within the Chinese industry and attract larger foreign capital investment. While the influx of capital further boosts the technological progress, a benign interaction effect was observed between the technological innovation and foreign investment. Findings of our study show that the policy of market borrowing technology is more effective, and the implementation of the new environmental policy will intensify the strategies between managers and enterprises. Results of our study show a positive interaction between R&D funding and foreign capital flows. Enhanced coordination activity within industrial organizations will generate more effective organizational and technological innovation, and attract a large flow of FDI. In addition, industry sample results highlight that a compensation effect of technological innovation in the raw materials and manufacturing industry, though environmental regulation of high-tech industries will generate a balance effect with respect to technological innovation. The government should emphasize on the enhancement of execution and effectiveness of environmental regulation, enhancing FDI and enlightening the synergistic possessions of environmental regulation and FDI.

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Notes

  1. p(IU) = IU/A = IU/IU∗, in this formula, \( A=\eta \left({q}_l^{\ast },l\right)-\varDelta \alpha {q}_h^{\ast }-\eta \left({q}_h^{\ast },h\right) \) stands for R&D investment IU∗ at the optimal output level, and IU has a positive correlation with output q, that is, the more R&D investment, the higher the production efficiency.

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Funding

This research is funded by Humanities and Social Sciences Planning Project of Ministry of Education Grant No. 18XJAGJW001 and National Social Sciences Project Grant No. 20BJY090.

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Author notes

  1. Shah Fahad, Dongbei Bai and Lingcai Liu contributed equally to this paper.

Authors and Affiliations

  1. School of Economics and Management, Leshan Normal University, Sichuan, 614000, Leshan, China

    Shah Fahad

  2. School of Economics, Anhui University of Finance and Economics, BengBu, 233030, China

    Dongbei Bai & Lingcai Liu

  3. College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China

    Zulfiqar Ali Baloch

Authors
  1. Shah Fahad
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  2. Dongbei Bai
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  3. Lingcai Liu
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  4. Zulfiqar Ali Baloch
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Contributions

All authors made significant contributions to the study conception and design. Data collection and methodology were performed by S.F and D.B. L.L and S.F did formal analysis and software. S.F wrote the original draft. Review and editing were performed by D.B and Z.A.B.

Corresponding author

Correspondence to Dongbei Bai.

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Highlights

• We examine whether environmental regulation affects foreign direct investment.

• The Chinese panel data over 2005–2014 provides a good setting for the investigation.

• A three-stage least square analysis method (3SLS) of simultaneous equations is employed for identification.

• We find strong evidence and a positive interaction between R&D funding and foreign capital flows

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Fahad, S., Bai, D., Liu, L. et al. Heterogeneous impacts of environmental regulation on foreign direct investment: do environmental regulation affect FDI decisions?. Environ Sci Pollut Res 29, 5092–5104 (2022). https://doi.org/10.1007/s11356-021-15277-4

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  • DOI: https://doi.org/10.1007/s11356-021-15277-4

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