Skip to main content
SpringerLink
Log in

Have environmental regulations restrained FDI in China? New evidence from a panel threshold model

  • Research Article
  • Published:
Environmental Science and Pollution Research Aims and scope Submit manuscript

Abstract

This paper aims to investigate the effect of environmental regulations on inward foreign direct investment in China. For this purpose, a panel threshold model was constructed to assess the threshold effects of environmental regulations on the influx of foreign direct investments (FDI) . The findings indicate that, under the influence of human capital, the impact of environmental regulations on FDI in China was characterized by a V-shaped curve, indicating an initial inhibitory effect followed by a subsequent increase. A plausible explanation is that specific pollution-generating FDI must withdraw from China because of stringent environmental regulations before human capital reaches a certain threshold level. Meanwhile, impaired by the adverse selection effect, some cleaner-production FDI cannot easily enter China. As a result, environmental regulations in this stage have an inhibitory effect on FDI in China. However, part of the pollution-generating FDI is converted into cleaner production after the human capital level reaches the threshold limit. Further, due to the positive selection effect, additional cleaner-production FDI can also enter China from different destinations. At this stage, environmental regulations boost overall FDI entering China.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6

Similar content being viewed by others

Data availability

The data that support the findings of the study is available from the corresponding author upon reasonable request.

Notes

  1. When human capital reaches a certain level, clean-type FDI enterprises will have the technical foundation to realize their comparative advantages and subsequently choose to enter the host country. The effect of attracting clean-type FDI into the host country is termed the "positive selection effect" in this paper.

  2. Three major indicators and methods for measuring the strength of environmental regulations are the pollutant control cost indicator, the positive indicator, and the reverse indicator. The use of pollutant control cost indicator in the analysis may lead to a more significant measure of the strength of environmental regulations for some provinces (cities) that have made fewer investments in environmental governance. As such, the measurement results for this indicator of environmental regulation strength may be biased. On the contrary, the positive indicator method can better reflect the strength of environmental regulations and the changes in various provinces (cities); however, the original statistical data required for this calculation have not been updated on a yearly basis. Unlike the two methods mentioned above, the reverse indicator method indirectly reflects the intensity and effect of environmental pollution governance from the perspective of pollutant emission, so it is one of the ideal standards for measuring the strength of environmental regulation.

  3. Clean-type FDI enterprises are generally knowledge-intensive enterprises, which can quickly adapt to strong environmental regulations, but they will be restrained by low-level human capital of the host country. When the human capital accumulation of the host country is not adequate, clean-type FDI enterprises will have difficulty realizing their comparative advantages and subsequently decide not to enter the host country. The adverse effect of attracting clean-type FDI into the host country is called as adverse selection effect in this paper.

  4. Clean-type FDI enterprises are generally knowledge-intensive enterprises, which can easily adapt to strong environmental regulations, but they will be restrained by the low level of the human capital of the host country. When human capital accumulation in the host country is not adequate, clean-type FDI enterprises will have difficulty realizing their comparative advantages and subsequently decide not to enter the host country. The adverse effect of attracting clean-type FDI into the host country is referred to as the adverse selection effect in this paper.

References

  • Cai X, Lu Y, Wu M et al (2016) Does environmental regulation drive away inbound foreign direct investment? Evidence from a quasi-natural experiment in China[J]. J Dev Econ 123:73–85

    Article  Google Scholar 

  • Caner M, Hansen BE (2004)  Instrumental variable estimation of a threshold model[J]. Econometric Theory 20(5):813–843

  • Cheng Z, Li L, Liu J ( 2018) The spatial correlation and interaction between environmental regulation and foreign direct investment[J]. J Regul Econ 54(2):124–146

  • Chung S (2014) Environmental regulation and foreign direct investment: evidence from South Korea[J]. J Dev Econ 108(2):222–236

    Article  Google Scholar 

  • Cole MA, Elliott RJR (2005) FDI and the capital intensity of “dirty” sectors: a missing piece of the pollution haven puzzle. Rev Dev Econ 9(4):530–548

    Article  Google Scholar 

  • Cole M, Fredriksson P (2009) Institutionalized pollution havens. Ecol Econ 68(4):1239–1256

    Article  Google Scholar 

  • Colin K, Kenichi S (2008) The effect of environmental regulation on the locational choice of Japanese foreign direct investment. Appl Econ 40(11):1399–1409. https://doi.org/10.1080/00036840600794330

    Article  Google Scholar 

  • D’Agostino LM (2016) How MNEs respond to environmental regulation: integrating the Porter hypothesis and the pollution haven hypothesis. Economia Politica 32:245–269

    Article  Google Scholar 

  • Dean J, Lovely M, Wang H (2017) Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China, pp 155–167

    Article  Google Scholar 

  • Dean MJ (2003) Foreign direct investment and pollution havens: evaluating evidence from China [J], U.S. International Trade Commission-Industry and Economic Analysis Working Paper: 04–01-B

  • Dijkstra BR, Mathew AJ, Mukherjee A (2011) Environmental regulation: an incentive for foreign direct investment[J]. Rev Int Econ 19(3):568–578

    Article  Google Scholar 

  • Di W (2007) Pollution abatement cost savings and FDI inflows to polluting sectors in China[J]. Environ Dev Econ 12:775–798

  • Dong Y, Tian J, Ye J 2020 Environmental regulation and foreign direct investment: evidence from China’s outward FDI[J]. Finance Res Lett 101611

  • Elliott RJR, Shimamoto K (2008) Are ASEAN Countries havens for Japanese pollution-intensive industry?[J]. World Econ 31(2):236–254

    Article  Google Scholar 

  • Elliott RJR, Zhou Y (2013) Environmental regulation induced foreign direct investment[J]. Environ Resource Econ 55(1):141–158

    Article  Google Scholar 

  • Eskeland GS, Harrison AE (2003) Moving to greener pastures? Multinationals and the pollution haven hypothesis. J Dev Econ 70:1–23

    Article  Google Scholar 

  • Fahad S, Wang J (2018) Evaluation of Pakistani farmers’ willingness to pay for crop insurance using contingent valuation method: The case of Khyber Pakhtunkhwa province[J]. Land Use Policy 72:570–577

  • Fahad S, Inayat T, Wang J, et al (2020) Farmers’ awareness level and their perceptions of climate change: A case of Khyber Pakhtunkhwa province, Pakistan[J]. Land Use Policy 96:104669

  • Fahad S, Bai D, Liu L, et al (2022) Heterogeneous impacts of environmental regulation on foreign direct investment: do environmental regulation affect FDI decisions?[J]. Environ Science Pollut Res 29(4):5092–5104

  • Ge Y, Hu Y, Ren S (2020) Environmental regulation and foreign direct investment: evidence from China’s eleventh and twelfth five-year plans[J]. Sustainability 12

  • Godil D, Yu Z, Sharif A, et al (2021) Investigate the role of technology innovation and renewable energy in reducing transport sector CO 2 emission in China: a path toward sustainable development[J]. Sustain Dev 29

  • Hansen B E (1999) Threshold effects in non-dynamic panels: estimation, testing, and inference[J]. J Econom 93

  • Huong NTL, Shun Bo Y, Fahad S (2017) Farmers’ perception, awareness and adaptation to climate change: evidence from northwest Vietnam[J]. Int J Clim Change Strategies Manage 9(4):555–576

  • Jaffe Adam B, Peterson Steven R, Portney Paul R, Stavins Robert N (1995) Environmental regulation and the competitiveness of U.S. manufacturing: what does the evidence tell us? J Econ Lit 33:132–163

  • Jin W, Gao S, Pan S (2022) Research on the impact mechanism of environmental regulation on green total factor productivity from the perspective of innovative human capital[J]. Environ Sci Pollut Res 1–19

  • Jugurnath B, Roucheet B, Teeroovengadum V (2017) Moving to greener pastures: untangling the evidence about Fdi and environmental regulation in EU countries[J]. J Dev Areas 51(2):405–415

    Article  Google Scholar 

  • Kalamova M, & Johnstone N (2011) Environmental policy stringency and foreign direct investment. OECD Environment Working Papers; No. 33

  • Karimi MS, Law S, Lee C et al (2013) Effect of human capital on foreign direct investment inflows[J]. J Econ Res (JER) 18:79–101

    Article  Google Scholar 

  • Kellenberg DK (2009) An empirical investigation of the pollution haven effect with strategic environment and trade policy[J]. J Int Econ 78(2):242–255

    Article  Google Scholar 

  • Keller W, Levinson A (2002) Pollution abatement costs and foreign direct investment inflows to U.S. States. Rev Econ Stat 84:691–703

    Article  Google Scholar 

  • Khan S, Sharif A, Golpîra H, et al (2019) A green ideology in asian emerging economies: from environmental policy and sustainable development[J]. Sustain Dev  27

  • Kheder SB, Zugravu N (2012) Environmental regulation and French firms location abroad: an economic geography model in an international comparative study[J]. Ecol Econ 77(none):48–61

    Article  Google Scholar 

  • Kheng V, Sun S, Anwar S (2017) Foreign direct investment and human capital in developing countries: a panel data approach[J]. Econ Chang Restruct 50(4):341–436

    Article  Google Scholar 

  • Kim YH, Yang EM (2015) Environmental protection versus incentives for FDI inflows: abatement technologies matter [J]. Int J Econ Sci 4:25–44

    Google Scholar 

  • Kim Y, Rhee D-E (2019) Do Stringent environmental regulations attract foreign direct investment in developing countries? evidence on the “race to the top” from cross country panel data[J]. Emerg Mark Financ Trade 55(12):2796–2808

  • Kolstad CD, Xing Y (2002) Do lax environmental regulations attract foreign investment?[J]. Univ California at Santa Barbara Econ Work Pap 21(1):1–22

    Google Scholar 

  • Lin L, Sun W (2016) Location choice of FDI firms and environmental regulation reforms in China[J]. J Regul Econ 50(2):207–232

    Article  Google Scholar 

  • Lin R, Gui Y, Xie Z, et al (2019) Green governance and international business strategies of emerging economies' multinational enterprises: a multiple-case study of Chinese firms in pollution-intensive industries[J]. Sustainability 11(4)

  • List JA, Co CY (2000) The effects of environmental regulation on foreign direct investment. J Environ Econ Manag 40:1–20

    Article  Google Scholar 

  • Mcguire M (1982) Regulation, factor rewards, and international trade[J]. J Public Econ 17:335–354

  • Millimet DL, Roy J (2016) Empirical Tests of the Pollution Haven Hypothesis When Environmental Regulation is Endogenous[J]. JAppl Economet 31(4):652–677

  • Muhammad B, Khan S (2019) Effect of bilateral FDI, energy consumption, CO2 emission and capital on economic growth of Asia countries[J]. Energy Reports 5:1305–1315

  • Mulatu A (2017) The Structure of U.K. Outbound FDI and environmental regulation[J]. Environ Resour Econ

  • Naughton HT (2014) To shut down or to shift: multinationals and environmental regulation[J]. Ecol Econ 102:113–117

    Article  Google Scholar 

  • Seo MH, Shin Y (2016) Dynamic panels with threshold effect and endogeneity[J]. J Econ 195:169–186

  • Sharif A, Afshan S, Nisha N (2017) Impact of tourism on co2 emission: evidence from Pakistan[J]. Asia Pacific Journal of Tourism Research 22:408–421

  • Sharif A, Raza SA, Ozturk I, et al (2019) The dynamic relationship of renewable and nonrenewable energy consumption with carbon emission: a global study with the application of heterogeneous panel estimations. Renew Energy 133:685–691

  • Sharif A, Baris-Tuzemen O, Uzuner G, et al (2020a) Revisiting the role of renewable and non-renewable energy consumption on Turkey’s ecological footprint: evidence from quantile ARDL approach[J]. Sustain Cities Soc 57:02138

  • Sharif A, Afshan S, Chrea S, et al (2020b) The role of tourism, transportation and globalization in testing environmental Kuznets curve in Malaysia: new insights from quantile ARDL approach[J]. Environ Sci Pollut Res Int 27(20):25494–25509

  • Suki NM, Sharif A, Afshan S, et al (2020) Revisiting the Environmental Kuznets Curve in Malaysia: the role of globalization in sustainable environment[J]. J Clean Prod 264:121669

  • Smarzynska J, Wei S (2004) Pollution havens and foreign direct investment: dirty secret or popular myth? Contrib Econ Anal Policy 3:1–32

    Google Scholar 

  • Tang JT (2015) Testing the pollution haven effect: does the type of FDI matter? Environ Resource Econ 60:549–578

    Article  Google Scholar 

  • Taylor BRCS (2004) Trade, Growth, and the environment[J]. J Econ Lit 42(1):7–71

    Article  Google Scholar 

  • Taylor MS (2005) Unbundling the Pollution Haven Hypothesis[J]. Advances in Economic Analysis & Policy 4(2)

  • Ullah A, Zhao X, Kamal M, et al (2020) Environmental regulations and inward FDI in China: Fresh evidence from the asymmetric autoregressive distributed lag approach[J]. Int J Financ Econon 27

  • Wagner UJ, Timmins CD (2009) Agglomeration effects in foreign direct investment and the pollution haven hypothesis. Environ Resource Econ 43:231–256

    Article  Google Scholar 

  • Walter I, Ugelow JL (1979) Environmental policies in developing countries. Ambio 8:102–109

    Google Scholar 

  • Xu J, Zhou M, Li H (2016) ARDL-based research on the nexus among FDI, environmental regulation, and energy consumption in Shanghai (China)[J]. Nat Hazards 84(1):1–14

    Article  CAS  Google Scholar 

  • Yang Y, Niu G, Tang D (2019) Does environmental regulation affect the introduction of foreign direct investment in China? –empirical research based on the spatial Durbin model[J]. Pol J Environ Stud 28(1):415–424

    Article  Google Scholar 

  • Yu X, Li Y (2020) Effect of environmental regulation policy tools on the quality of foreign direct investment: an empirical study of China[J]. J Clean Prod 270:122346

  • Zhonghua C, Lianshui L, Jun L (2018) The spatial correlation and interaction between environmental regulation and foreign direct investment[J]. J Regul Econ 54(2):124–146

    Article  Google Scholar 

Download references

Funding

National Statistical Research Project “A Statistical Study on the Threshold Effect of Environmental Regulation on Technological Innovation and Energy Use Efficiency’’ (Project No. :2020LZ37).

“Research on the Nonlinear Impact of Environmental Regulation on High-quality Economic Development”, Major Philosophical and Social Science Basic Research Project of Henan Provincial Universities (Project No. :2021-JCZD-23).

Author information

Authors and Affiliations

  1. Department of Mathematical Sciences, Purdue University, Indianapolis, IN, 46202, USA

    Tingbo Guo

  2. Academy of Hinterland Development, Henan University, Kaifeng, 475000, Henan Province, China

    Bowen Zheng

  3. Department of Economics, Abdul Wali Khan University Mardan, Mardan, Khyber Pukhtunkhawa, Pakistan

    Muhammad Abdul Kamal

Authors
  1. Tingbo Guo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bowen Zheng
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Muhammad Abdul Kamal
    View author publications

    You can also search for this author in PubMed Google Scholar

Contributions

Tingbo Guo, investigation, supervision, data pre-processing, conceptualization, writing-review and editing; Bowen Zheng, formal analysis, writing-review, and editing; Muhammad Abdul Kamal, writing-review and editing.

Corresponding author

Correspondence to Bowen Zheng.

Ethics declarations

Ethics approval and consent to participate

Not applicable.

Consent for publication

Not applicable.

Competing interests

The authors declare no competing interests.

Additional information

Responsible Editor: Arshian Sharif

Publisher's note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Guo, T., Zheng, B. & Kamal, M.A. Have environmental regulations restrained FDI in China? New evidence from a panel threshold model. Environ Sci Pollut Res 30, 39733–39749 (2023). https://doi.org/10.1007/s11356-022-24841-5

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11356-022-24841-5

Keywords

Search

Navigation