Foreign Direct Investment and Air Pollution: Re-Estimating the “Pollution Haven Hypothesis” in China

Abstract

This paper focuses on the relationship between foreign direct investment (FDI) and air pollution. Based on the relaxation of China’s FDI regulation policy as well as the “China Environmentally Extended Input-Output” database, we utilize a difference-in-differences methodology and investigate the casual effects of FDI liberalization on air pollution intensity. The empirical results demonstrate that FDI reduces the air pollution intensity. However, it is more pronounced in sectors with higher levels of absorption ability and human capital. The reduction in air pollution is mainly driven by technical effects through the enhancement of total factor productivity and technological efficiency. FDI can help achieve the green development goals in developing countries with a more liberalized policy.