A Study On Foreign Direct Investment And Environment

The Industrial Revolution originated from Europe has promoted the human society into a rapid development phase, and the deepening of industrialization has been accompanied by the over-consumption of natural resources and the severe environmental pollution, thus resulting in such global environmental issues as water resources crisis, the depletion of ozone layer, the greenhouse effect and the extincton of bio-species, which has posed a serious threat to the survival of human beings and its sustainable development. In the field of international economics, people began to pay attention to the impact of international trade and capital flows on the environment, and gave rise to the Polluton Havens Hypothesis and so on.The post-1978 market-oriented economic reforms in China have turned the country into one that is most attractive to foreign direct investment (FDI). In 1990s, China is second to the United States in the world and No. 1 among developing countries in attracting FDI. In its thirty years' development, the accumulated foreign capital into China has reached $5000 billion. As the key engine in promoting economic growth, the average contribution ratio of FDI China's economic growth has reaced 2.3% in 1990s.At the same time, China's environment has been worsening. At present, out of the ten most heaviely polluted cities in the world, six are in China. In China, 46.5% of rivers are polluted and 10.6% of them have been seriously polluted, more than 90% of urban waters are severely polluted and 300 million citizens are drinking water below healthy standards. According to the report by the World Health Organization (WHO) in 2006, about 74% of Chinese citizens live in air-polluted ares.The simultaneous rise of FDI and environment deterioraton index stimulated people to ponder on the correaltion between the two phenomena both theoretically and practically in order to formulate feasible policy designs to solve the problem if it were.It is practically significant to identify the correlation between Foreign Direct Investment and Environment for both the realization of the national economy's healthy, rapid and sustainable development and its transition towards the environmentally friendly and reources-saving development path. To probe into the issue theoretically is helpful in enriching and perfecting relevant research fields in both national economics and international economics. First of all, there are still many fields left unresearched in the above-mentioned issue and there still exist uncertainties in research objectives, research tools and research methodology. Secondly, to research into the issue of FDI and Environment, it is necessary to refer to and apply comprehensively such relevant subjects as international economics, environment economics,and regulation economics etc. and to ponder over it against the framework of sustainable development for the formulation of scientific and feasible policy proposals. The study thus provides a perfect opportunity to learn from the theoretical achievements of other subjects.After reviwing relevant literature on FDI and Environment, it is found that there exist two controversal groups of theoretical viewpoints and policy proposals. Although enough attention has been paid to the attraction of FDI in China, scarecely has any systematic research been found on the environmental effect of FDI, which is far behind those in developed countries. So, a careful literature reviw has been carried out first to find out the discrepancies and research objectives.Then, a general analysis is done on the issue from both macroeconomic and microeconomic perspectivesthe, on the basis of which a Eclectic Paradigm perspective is applied to study the environmental effect of FDI. It is found that there exist strong incentives for FDI enterprises to impose self-regulation for purpose of realizing corporate competitive advantages. After that, the impact of FDI on environment and the optimal international policy instrument composite on the issue is described and analyzed with the conclusion that on the premises of proper international coordination and the corruption level decline in the host country, the positve environmental effect of FDI will be exerted.Since China adopted its open-door policy, the government exerted great enthusiasm in the pursuit of economic growth, which contributes to the competition for FDI in different areas, together with the imperfect reources use systems, improper envrionment protection institutions and their inefficient implementation, in additoin to the special sources of FDI (mainly from Hong Kong and Macao), all determine that China is surely a special case to study. Therefore, the paper probes into the decisive favctors on FDI and an empirical study on the correlationship between FDI and environmental regulation is carried out with the conclusion that FDI and environment are mutually causual to each other. The paper finally concludes with the package of solutions to erase the negative environmental effect of FD1, that is, the combination of international regulation, host country regulation, home country regulation, corporate self-regulation and civil regulation is the only way out.The paper is guided by Marxist dialectical materialism, adheres to the combination both of theories and pratices and of quantative analysis and qualitative analysis, applies normative and empirical methods, bases itself on such modern economic theories as those in national economics, sustainable development economics, environment economics, regulation economics, welfare economics, game theory and econometrics, and properly absorbes and refers to theories in other subjects, such as ecological economics and public administration.Firsrt of all, the paper applies the theory of eclectic paradigm to study comprehensively the environmental impact of FDI enterprises, drawing the distinctively different conclusions from those of international trade and ecological economics. So the issue has been studied and analyzed dialectically and objectively. The paper refers to the analytical tools in microeconomics and game theory, probes into the optimal option of international policy instruments and also the role that corruption plays in weakending host country's environmental regualtion efforts. The paper also applies econometric tools to study empirically the decisive factors on FDI in China, expecially the relationship between FDI and environment regualtion with the conclusion that the two are mutually causual.The paper combines theorectical methods and empirical methods together to study the relevant issue and its conclusion is in coherence with those of Marxist dialectical materialism.The innovation of the paper lies in three points. Firstly, on the basis of literature review, the paper applies eclectic paradigm theory to analyze and evaluate the environmental effect of FDI from the perspectives of both Multinational Corporation's (MNCs) pollution production transfer and the environmental behavior of their overseas subsidiaris, concludes that MNCs have strong incentives to carry out the transboundary production of environmental quality and thus achieving production and marketing advantages. It is also found in subsequent model analysis that FDI will contribute to the improvement of environment if a proper package of policy instruments is applied, including those of both host and home countryies'. Secondly, the paper takes into consideration China-specific conditions and its special development stage, collects the consecutive nineteen years' data from 1987 to 2005, with the FDI inflow as the explanatory variable and with economic development level, laobor cost, three industrial wastes emission and reources production as auxiliary variables, systematically probes into the relationship between FDI and environmental regulation, with the finding that environmental regulation and FDI are mutually causal to each other. The enhancement of environmental regulation will hinder the inflow of FDI and the inflow of FDI will also reinforce one country's environmental regulation.Lastly, the paper brings forth a systematic package of regulatory framework design. With special reference to FDI's neagtive environmental effect in developing countries, the paper puts forward the scheme of deleting corruption and combining international regulation, host country regulation, home country regulation, civil regulation and corporate self-regulation in order to maximize FDI's positive environmental effect.Of course, there are still drawbacks in the paper to perfected and further probed into. Actually, the study on the environmental effect of FDI can never depart from the context of sustainable development. MNCs' environmenta behavior and social accountability are equivalent and in consistency with each other. FDI's environmental behavior, its social accountability and their contribution to sustainable development will be the author's future reseach field. At the same time, the inaccuracy of statistics and China's complex conditions, especially the great differences among ares will surely have impact on the paper's conclusions and their universal guidance on the issue.