A Research On The Effect Of Environmental Regulation And Government Efficiency On Location Choice Of FDI

Foreign direct investment(FDI),as a key engine for economic growth,has maintained rapid growth in China since the reform and opening-up.According to the number released by United Nations Conference on Trade and Development(UNCTAD),the volume of inbound FDI that China absorbed reached 135.6 billion US dollars in 2015,accounting for 7.7%of the total number in the world.FDI has significant contribution to economic growth,which has been proved by numerous studies,and become a much sought-after indicator in the evaluation of the work of local governments.Heterogeneity of investment environment of local governments has enlarged gaps of regional inbound FDI flows.The result is that the amount of FDI attracted by western part of China has been dwarfed by that of eastern part of China.However,the lowering of standards of environmental regulation by many local governments became a concomitant of the desire to attract more FDI,which has aggravate the deterioration of resources and the environment.Environmental issues have become more of a public concern.China’s development has entering a new normal of "three tasks" which requires coping with the slowdown in economic growth,making difficult structural adjustments and absorbing the effects of the previous economic stimulus policies simultaneously.Key words such as governmental function change,efficiency improvement,environmental regulation enhancement,push for green development,commitment to the development of open economy and win-win cooperation have been reaffirmed in the 13th Five-year Plan.The central government has earmarked large amounts of special funds for environment protection and instituted a series of policies and regulations.However,some inefficient local government has spent inordinate amount of resources to woo foreign investors and compromised on environment protection,due to particularity of the Chinese political system and the issue of term of office in performance evaluation.Will strict environmental regulation inevitably lead to decreased attraction to inbound FDI?To what extent can efforts to promote economic,cultural and social development of a region win the hearts of foreign investors?Is there an equilibrium between the levels of environment regulation of a region and local government efficiency management,in which the government can get maximum returns and attraction to FDI?These are the questions that the present research attempts to answer.In the part of theoretical study in the present paper,drawing on research findings of previous studies,the author divides the mechanism in which environmental regulation affecting FDI flows into reverse cost effect and innovation compensation effect.The effects of governmental efficiency on FDI flows can be divided into cost reduction effect and investment incentive effect.Based on the theories of microeconomics,the objectives of governmental achievements and the multinational corporations(microcosmic representation of FDI)are simplified as the pursuit of profit maximization,and the general equilibrium mathematical model is constructed respectively.Under the assumption of local government homogeneity,we deduce the mathematical formula of how to maximize the net income of local government environmental regulation and government efficiency;under the assumption of local government heterogeneity,this paper depicts the two-way transmission mechanism of environmental regulation to FDI attractiveness,the reverse amplification effect of government efficiency on FDI transaction cost and the combined effect of environmental regulation and government efficiency on FDI location selection.In the empirical research part,this paper constructs the environmental regulation index by using the reverse comprehensive index of environmental pollution.This paper chooses the representative input-output indicators of education,people’s livelihood,culture and health,and builds the local government efficiency index based on DEA algorithm.In order to further explore the adjustment effect of environmental regulation on government efficiency and FDI,the author introduces the primary and secondary crossings of government efficiency and environmental regulation.On the basis of this,the paper uses the panel data of 274 prefecture-level cities in 2003 and 2013 to construct the dynamic panel model,and focuses on the adjustment effect of the interaction between environmental regulation and government efficiency on FDI location.The results show that FDI has a significant effect on the location of current FDI,and government efficiency has a significant positive impact on FDI ’s location decision.The interaction between environmental regulation and government efficiency has a nonlinear inverted U-type relationship with FDI,that is,with the increase of the overall environmental regulation level,the attractiveness of government efficiency to FDI location rises and then decreases.In the case of regional samples,this inverted U-shaped curve is very obvious in the midwest sample,while the eastern region has a U-shaped characteristic with the increase of environmental regulation under the influence of government efficiency.In the case of urban scale,the attraction of FDI in large,medium and small cities shows significant inverted U characteristics.This is mainly due to the pressure from local government performance appraisal,the different investment threshold effect and the market incentive effect caused by environmental regulation have on foreign-funded enterprises of different types of industries and investment scale.Finally,this paper puts forward relevant policy suggestions on the basis of the above conclusions.The present research has implications for the local government to find the critical point of environment regulations to effectively attract inbound FDI flows.This paper facilitates a deeper understanding of the mechanism of FDI growth with Chinese characteristics,providing a new way of thinking for the government to institute sound environmental regulations,so as to make for balanced decisions concerning economic growth,public goods investment and environmental protection.