Environmental regulation and foreign direct investment attractiveness: Evidence from China provinces

• Published date: 01 May 2022
• Author: Qian Wang,Zhuoya Du,Boyu Wang,Yung‐ho Chiu,Tzu‐Han Chang
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/rode.12871

Rev Dev Econ. 2022;26:899–917. wileyonlinelibrary.com/journal/rode

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899

© 2022 John Wiley & Sons Ltd

Received: 3 July 2020

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Revised: 14 December 2021

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Accepted: 21 January 2022

DOI: 10.1111/rode.12871

REGULAR ARTICLE

Environmental regulation and foreign direct

investment attractiveness: Evidence from China

provinces

QianWang1

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ZhuoyaDu1

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BoyuWang1

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Yung- hoChiu2

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Tzu- HanChang2

1Public Sector Research Center

KRI,School of Economics, Jilin

University, Changchun, Jilin Province,

P.R. China

2Department of Economics, Soochow

University, Taipei City, Taiwan

Correspondence

Yung- ho Chiu, Department of

Economics, Soochow University, No. 56,

Kueiyang St., Sec. 1, Taipei City 10048,

Taiwan.

Email: echiu@scu.edu.tw

Funding information

Supported by the MOE Project of KRI

(16JJD790018)

Abstract

China strengthened environmental regulation to inhibit

the formation of new pollution havens and to change

its growth mode. This study explores the efficiency

for attracting foreign direct investment (FDI) with the

inclusion of environmental regulation in 31 Chinese

provinces over the period 2015– 2017, using a dynamic

direction distance function- data envelopment analysis

(DDF- DEA) model. The empirical results show that the

mean overall efficiencies and ranks in the eastern region

are significantly higher than those in the non- eastern

regions with or without environmental regulation, but

the environmental regulation has a greater impact on

the efficiency of attracting FDI in the economically

developed areas. The average efficiencies for both the

number of foreign companies and FDI amount in the

eastern regions are higher than those in the non- eastern

regions. The industrial pollution control expenditure ef-

ficiency with the inclusion of environmental regulation

of each province keeps in efficiency frontier. Relative to

the efficiency of input variables, the output efficiencies

in the non- eastern regions have more scope to improve.

KEYWORDS

China, DDF DEA, dynamic DEA, environmental regulation, FDI

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WANG et al.

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INTRODUCTION

Environmental regulation has significant influence on attracting foreign direct investment (FDI)

according to the pollution haven hypothesis (Cole et al., 2005; Copeland, 1994). With environ-

mental regulation as the influencing factor for attracting FDI, this study uses dynamic data en-

velopment analysis to evaluate FDI efficiencies with the inclusion of environmental regulation

in 31 provinces of China over the period 2015– 2017. In the past 15 years, the FDI in China has

grown at an annual rate of 22% and contributes to the economic growth. Under the increasingly

severe situation of China's resources and environmental problems, China strengthened environ-

mental regulation recently, proposed to change the previous extensive economic growth model

to healthy and sustainable green development. Therefore, the study on FDI efficiency with the

inclusion of environmental regulation can provide sound identification of the bottleneck and

potential space of FDI attractiveness. Clarifying whether environmental regulation will become

the external driving force for the upgrading of FDI quality will provide theoretical and empirical

implication for researchers, multinational investors, and environment policy makers.

FDI has made significant contributions to promoting the economic growth of the host coun-

try, generating employment and expanding the scale of trade imports and exports (Barrios et al.,

2005). Therefore, scholars explore the influencing factors for FDI attractiveness. Traditionally,

some researchers focus on economic factors such as labor costs, infrastructure, and exchange rate

(Caves, 1974; Cheng & Kwan, 2000; Grosse & Trevino, 1996). Following North (1990), scholars

study the influence of institutions on FDI attractiveness (Bailey, 2018; Globerman & Shapiro,

2002). Due to the worldwide problems of climate change since the 21st century, many countries

have implemented environmental regulation policy to achieve green growth. Environmental

regulation is regarded as an intervention or restriction on the activities of economic subjects

(especially enterprises) under the condition of market economy. The role of the host country’s en-

vironmental regulation in attracting FDI has been approved by a lot of literatures. Scholars begin

to focus on the influence of environmental regulation on FDI (Antweiler et al., 2001; Asghari,

2013; Bu & Wagner, 2016). Some scholars use national data for empirical analysis (Perkins &

Neumayer, 2009; Sapkota & Bastola, 2017).

Quite many scholars use data envelopment analysis (DEA) to measure the efficiency of FDI.

Using DEA model, some scholars study the efficiency of attracting FDI (Dai, 2016; Lei et al.,

2013). Some scholars study the efficiency of FDI utilization (Mastromarco & Simar, 2015; Teplova

& Sokolova, 2019; Zhang et al., 2019).

This paper contributes to literature in three ways. First, it is the first study on the relationship

between environmental regulation and FDI attractiveness by using DEA. The existing literature

on environmental regulation and FDI attractiveness mostly uses the econometric regression

model, which needs to set the specific function form. DEA model need not assume the function

form, avoiding the endogenous problems. At the same time, by adding or rejecting environmen-

tal regulation variables in the DEA model, it can accurately analyze the impact of environmental

regulation on FDI efficiency and its regional differences. Second, instead of using static DEA

we use dynamic DEA to provide cross period comparison. Third, the regional heterogeneity is

studied. We divide the 31 provinces in China into the eastern and the non- eastern regions. By

JEL CLASSIFICATION

C67; D83; F21; F23