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Does Air Pollution Crowd Out Foreign Direct Investment Inflows? Evidence from a Quasi-natural Experiment in China

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Abstract

This study investigates whether air pollution crowds out foreign direct investment in China. We use a regression discontinuity design based on the lower air pollution to the South of the Qinling Mountains–Huai River line because the government did not develop coal-based central heating networks there, contrary to north of the line. We observe that for every 1% increase in PM2.5 concentration, foreign direct investment flows decrease by 0.393%, and foreign direct investment stocks decrease by 0.015%. By tracing the potential mechanisms, we find that air pollution may exert a negative impact on foreign direct investment inflows through its impacts on the health risks of the labor force and health insurance spending of foreign firms.

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Notes

  1. The original grid mesh from the SEDAC has a grid cell resolution of 0.5° × 0.5°. The specific data are available at http://beta.sedac.ciesin.columbia.edu.

  2. This database collects information of all firms covering more than 40 major industries, more than 90 categories, and more than 600 sub-industries, and the total output value of the firms surveyed accounts for more than 90% of China's total industrial output value.

  3. The QH line ranges between 33.03° and 34.25° latitude, and we select the mean of the latitude covered by the QH line as the breakpoint boundary.

  4. Following Chen and Whalley (2012), we draw the RD graphs using the residual values after regression fitting, and shades of gray indicate 95% confidence intervals. According to the AIC and BIC criteria, the optimal order of the running variable is selected as the third order in this paper, and the same treatment is performed below.

  5. Before the RD estimates, we depict the relevant breakpoint diagrams in Fig. 3 in “Appendix”. Figure 3 in “Appendix” shows the discontinuity of different pollutants and FDI measurements at the boundary line, confirming that the degree of air pollution in the north is significantly higher than in the south, and FDI (regardless of the FDI flows or FDI stocks) in the north is significantly lower than in the south, which further illustrates the rationality of the RD approach.

  6. Figure 4 in “Appendix” depicts the discontinuity of PM2.5 and morbidity at the QH line.

  7. Figure 5 in “Appendix” depicts the discontinuity of PM2.5 and health insurance spending at the QH line.

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Acknowledgements

This research was supported by the National Social Science Foundation of China (Grant No. 16BJL058).

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Authors and Affiliations

  1. School of Economics, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan, 430074, Hubei, People’s Republic of China

    Weibing Li & Kaixia Zhang

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  1. Weibing Li
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  2. Kaixia Zhang
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Correspondence to Kaixia Zhang.

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Appendix

Appendix

See Tables 9, 10 and Figs. 3, 4, 5.

Table 9 Summary statistics
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Table 10 Results for alternative key indicators
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Fig. 3
figure 3

Different air pollutants and FDI measurements against their degrees north of the QH line. Notes: a Discontinuity of PM2.5, SPD, FDI flows and stocks in 164 cities at the QH line. The first row in b depicts the discontinuity of the AQI, FDI flows and FDI stocks in 193 cities at the QH line, and the second row in Panel B depicts the discontinuity of SO2, FDI flows and stocks in 84 major cities at the QH line

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Fig. 4
figure 4

PM2.5 and morbidity against their degrees north of the QH line

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Fig. 5
figure 5

PM2.5 and health insurance spending against their degrees north of the QH line

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Li, W., Zhang, K. Does Air Pollution Crowd Out Foreign Direct Investment Inflows? Evidence from a Quasi-natural Experiment in China. Environ Resource Econ 73, 1387–1414 (2019). https://doi.org/10.1007/s10640-019-00329-8

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