The impact of FDI on air quality: evidence from China
| DOI | https://doi.org/10.1108/17544401111143436 |
| Pages | 81-98 |
| Date | 21 June 2011 |
| Published date | 21 June 2011 |
| Author | Berna Kirkulak,Bin Qiu,Wei Yin |
| Subject Matter | Economics |
The impact of FDI on air quality:
evidence from China
Berna Kirkulak
Faculty of Business, Dokuz Eylul University, Izmir, Turkey
Bin Qiu
School of Economics and Management, Southeast University,
Nanjing, China, and
Wei Yin
Cardiff Business School, Cardiff University, Wales, UK
Abstract
Purpose – This paper seeks to examine the impact of foreign direct investments (FDI) on air
pollution in China using 286 cities from 2001 to 2007. It is a particular interest of this paper to observe
the relationship between FDI and air pollution in particular after China joined to World Trade
Organization in 2001. This paper provides a better understanding of economic growth and foreign
investment while maintaining a sustainable environment. In order to achieve this task, this paper tests
whether or not FDI inflow has impact on environmental deterioration in particular on air quality.
Design/methodology/approach – Since the data are both cross-sectional and time series, panel
data analyses (fixed effects and random effects) were applied. In order to detect the presence of serial
correlation of error term, Durbin-Watson test was used. As serial correlation problem was determined,
generalized least square (GLS) using Ar(1) model was used to overcome serial correlation.
Findings – The findings show that FDI has no negativeimpact on the air quality inChina. Contrary to
expectations,the presenceof FDI reduces the air pollution.This result can be attributedby the role of FDIs
in the economy that FDIs are perceived as main sources of advanced technology in China. One of the
striking findingsof the paper shows that FDI has no significant impact on airquality in the central and
western cities. The reason is that low level of FDI inflowsto cities located in the Center and West. The
findings are robustunder both panel data (fixed effects and random effects)and GLS estimations.
Practical implications – The results provide a wide array of information useful to practitioners,
policy makers. Since the paper shows that FDI has no negative impact on the air quality, this result is
crucial in attracting FDI to China.
Originality/value – This paper provides the largest sample including 286 cities all over China from
2001 to 2007. Considering the distribution of FDI across China, the sample is divided into three regions.
Making sub-samples of the FDI distribution allowed us to examine how the impact of FDI differs on
air quality in the East, Central and West regions.
Keywords Foreign directinvestments, Air pollution, Economic development, China
Paper type Research paper
1. Introduction
One of the side effects of the economic growth is environment deterioration.
Environmental pollution is a by-product of production or consumption processes.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
JEL classification – O13, O18, Q25, O53, R1, F23
Bin Qiu would like to thank the support provided by Program for New Century Excellent
Talents in University (NCET-09-0291) and China National Social Science Project (10BJY081).
Impact of FDI
on air quality
81
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 4 No. 2, 2011
pp. 81-98
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401111143436
The recent China’s rapid economic growth and increasing foreign investment raised a
question of environmental degradation. The rapid economic growth and increase in the
purchasing power of people reflect in consumption patterns. A market expansion
occurs due to economic prosperity. While China is experiencing upward trend in
industrialization, consumption of local people is changing due to increase in their
economic wealth.
Energy consumption is a major concern to support the economic growth and as well
as the domestic demand. China has an abundance of energy and the most common
form of energy is coal. Most of the sulfur dioxide (SO
2
) released into air is from coal and
SO
2
is one of the main sources of pollution in the air. In China, coal is the primary
source to meet its national energy needs and this leads to atmospheric pollutant called
SO
2
. In 2001, coal constituted about 64 per cent of China’s energy consu mption (Day,
2005). The Chinese Government tries to control pollution through the environmental
regulations, which are mainly based on taxation. If the companies’ pollution levels are
above the standards, they pay taxes. Monitoring polluters and inspections of reported
pollution are crucial for enforcing the environmental regulations (Dasgupta et al., 2002;
Wang and Jin, 2007; Lin, 2008). However, there are variations in the enforcement of
environmental regulations. While the firms located in high-income level regions are
more likely to be imposed stricter environmental regulations and more inspections,
the firms located in less developed regions face flexibility in enforcing the
environmental regulations. (Wang and Wheeler, 2003). Further, firms with different
ownership structures are subject to different treatments by official authorities.
For example, state-owned enterprises, as the backbone of the national economy, have
priorities and have more governmental protections. This gives them less incentives to
reduce pollution and pay less charges (Wang and Jin, 2002).
Pollution is closely linked to economic growth. Trade liberalization and foreign
direct investments (FDIs) are important engines for economic growth. Direction of the
trade between the countries can be influenced by the environmental regulations.
Pollution havens are created in countries with low-environment standards. Pollution
haven hypothesis refers to the possibility that trade liberalization leads to movement of
polluting industries from high-income level countries to the countries that have weaker
environmental standards (Copeland and Taylor, 2004). The pollution haven hypothesis
posits the relocation of heavy polluting industries from developed countries to
developing countries, where stringent environmental policies do not exist. Since the
FDIs are cost seeking, developing countries with low-labor cost and lax environmental
regulations become attractive. When firms avoid environmental regulations by
relocation, they can become more efficient in terms of cost reductions. Environmental
Kuznets Curve (EKC) is a popular tool for examining the relationship between
environmental degradation and economic growth. This approach was first suggested
by Kuznets (1955) and it was developed by Grossman and Krueger (1991) and Selden
and Song (1994). EKC hypothesis proposes an inverse U-shaped relationship between
environmental degradation and economic growth.
In particular, following China’s accession to the World Trade Organization (WTO ),
the country has become an important base for export-driven economy. Since the
export products are energy intensive, China’s economic growth and its side effects are
of great interest to policy makers and researchers. He (2006) stated that China’s
economics growth is accompanied by growth in environmental pollution problems.
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