Exploring Dynamic Impact of Foreign Direct Investment on China's CO2 Emissions Using Markov-Switching Vector Error Correction Model

The impact of foreign direct investment (FDI) on China's CO2 emissions is an important index to evaluate the effect of foreign investment policy. This paper uses the monthly data of CO2 emissions and FDI from January 1997 to December 2013 to analyze the regime states, switching probability and regime correlation between FDI and CO2 emissions with the help of nonlinear Markov-switching vector error correction model (MS-VECM), The results indicate that the influence of FDI on CO2 emissions shows the two-regime dynamic characteristics, FDI has played a stimulating role in promoting China's CO2 emissions during the period from January 1997 to October 2003, while played an inhibiting role during the period from November 2003 to December 2013. The duration of the inhibiting effect of FDI on CO2 emissions is longer, and the frequency is higher than that of the stimulating effect. Therefore, the overall influence of FDI on CO2 emissions during the period from January 1997 to December 2013 is inhibitive, which means FDI has contributed to CO2 emissions reduction. The innovation points of this study are mainly reflected in the following two aspects: first, nonlinear MS-VECM is introduced to dynamically study the relationship between FDI and CO2 emissions in contrast to prior studies that simply use static analysis method; second, the effect of China's foreign investment policies on CO2 emissions is evaluated in each period according to the empirical results of MS-VECM.