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

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.

Automated summary

This paper investigates the impact of environmental regulations on inward foreign direct investment (FDI) in China. A panel threshold model is used to assess the threshold effects of these regulations on FDI. The findings reveal a V-shaped curve, indicating that environmental regulations initially inhibit FDI, but later lead to an increase in FDI. This can be explained by the need for pollution-generating FDI to withdraw from China due to strict regulations until the human capital level reaches a certain threshold. Once this threshold is reached, converted cleaner-production FDI and additional FDI from different destinations enter China, boosting overall FDI.