Research On How Does FDI Affect Environmental Quality In China?A Perspective Based On Pollution Haven And Environmental Kuznets Curve Theory

Foreign Direct Investment(FDI),apart from being a strategic tool for infusion of funds and transfer of technology,has its impacts upon the environment factors of a country.Considering the case of China,the present study necessitates to highlight the environment quality of the country in the wake of increasing trends of FDI.This study attempts to present both the empirical as well as technical approach to explain the consequences of FDI and factors in relation to environments by using two theories-Environmental Kuznets Curve which was originally used to measure the relationship between the level of income and the pollution level and Pollution Haven Hypothesis which will show whether the lax environmental regulation is responsible for the higher inflow of foreign direct investment or not.The time period for the analysis have taken from 2003-2014 as the level of pollution in China has increased significantly during this period.The data for the analysis has been collected from the National Bureau of Statistics of China.In this thesis,firstly the pollution haven hypothesis is tested using the time series data for the overall China where FDI has been taken as the dependent variable and emission of SO2 as the independent variable along with other control variables.Results for the pollution haven hypothesis shows that the environmental regulation was not the main reason for foreign companies toward China.So there is not exists pollution haven hypothesis in case of China.Following that the impact of foreign direct investment on environmental degradation is considered.Emission of SO2 been taken as the proxy for the air pollution and the emission of waste water(WWD)as the proxy for the water pollution in China.The main independent variable is the inflow of foreign direct investment.Other control variables for the study include per capita gross domestic product,unemployment rate,literacy rate,share of exports,and share of imports,total road length(proxy for infrastructure)and total population.Results show that when regression was run for China as a whole and taking dummy variable for provinces,FDI shows negative impact on the emission of SO2 indicating that with inflow of FDI the emission of SO2 declines while leads to the increase in waste water drainage.It can be said that the pollution level in the economy of China is surely increased by rise in the level of FDI in the country but only the waste water drainage and not the sulphur dioxide emission.Similarly,to examine whether the inflow of FDI has led to environment degradation in various provinces in China the analysis was conducted at the province level.So,provinces of China were divided into four different regions based on the division in China statistical year book namely the east,central,west and north east.Results from province level analysis shows that inflow of FDI has led to decline in the emission of SO2 for most of provinces in the eastern region whereas in case of the waste water,FDI has positive impact on emission of waste water hence degradation of the environment.In case of the center region provinces FDI has led to higher emission of SO2 for most of the provinces.On the other hand,the FDI has led to higher emission of waste water whereas it has led to lower emission of waste water in some provinces.For most of the provinces in the western region the inflow of FDI do not show similar impact on all provinces in this region.For some provinces it has led to higher emission of SO2 whereas for some provinces the emission of SO2 decline with the inflow of FDI.However,in case of waste water the emission of waste water decline with the increase FDI.Finally results from the north east region shows that with increase in FDI the emission of SO2 declines for most of the provinces.Similarly,in case of waste water also the inflow of FDI led to decrease in the emission of waste water.In a nut shell,this study suggests that uniform environmental regulation in all the regions,Adjusting and making a balance between export product structure and trade growth mode,focusing on foreign firms which use latest technology to reduce both the emission of air and water pollution and strengthening the legal system and market mechanism of property rights protection can be helpful to reduce and control environmental problems in China.