The impact of FDI on air quality: evidence from China

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.

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.

The findings show that FDI has no negative impact on the air quality in China. Contrary to expectations, the presence of FDI reduces the air pollution. This result can be attributed by the role of FDIs in the economy that FDIs are perceived as main sources of advanced technology in China. One of the striking findings of the paper shows that FDI has no significant impact on air quality in the central and western cities. The reason is that low level of FDI inflows to cities located in the Center and West. The findings are robust under both panel data (fixed effects and random effects) and GLS estimations.

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.

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.