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Does environmental regulation drive away inbound foreign direct investment? Evidence from a quasi-natural experiment in China

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Listed:
  • Cai, Xiqian
  • Lu, Yi
  • Wu, Mingqin
  • Yu, Linhui

Abstract

This paper investigates whether environmental regulation affects inbound foreign direct investment. The identification uses the Two Control Zones (TCZ) policy implemented by the Chinese government in 1998, in which tougher environmental regulations were imposed in TCZ cities but not others. Our difference-in-difference-in-differences estimation explores three-dimension variations; specifically, city (i.e., TCZ versus non-TCZ cities), industry (i.e., more polluting industries relative to less polluting ones), and year (i.e., before and after the TCZ policy). We find that tougher environmental regulation leads to less foreign direct investment. Meanwhile, we find that foreign multinationals from countries with better environmental protections than China are insensitive to the toughening environmental regulation, while those from countries with worse environmental protections than China show strong negative responses.

Suggested Citation

  • Cai, Xiqian & Lu, Yi & Wu, Mingqin & Yu, Linhui, 2016. "Does environmental regulation drive away inbound foreign direct investment? Evidence from a quasi-natural experiment in China," Journal of Development Economics, Elsevier, vol. 123(C), pages 73-85.
    • Handle: RePEc:eee:deveco:v:123:y:2016:i:c:p:73-85
    DOI: 10.1016/j.jdeveco.2016.08.003
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    More about this item

    Keywords

    Environmental regulation; Foreign direct investment; Pollution haven effect; Difference-in-difference-in-differences estimation; Two control zones;
    All these keywords.

    JEL classification:

    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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