Download Management & Engineering Environmental Quality

Management & Engineering 12 (2013) 1838-5745
Contents lists available at SEI
Management & Engineering
journal homepage: www.seiofbluemountain.com
An Empirical Study on the Effect of FDI Inflows on China’s
Environmental Quality
Jinjin TIAN, Qing XIN
School of International Economic and Trade, Shandong University of Finance, 250014, Shandong, P.R.China
KEYWORDS
ABSTRACT
Foreign direct investment,
Environmental quality,
Panel data,
Hausman testing
Since the reform and opening, FDI inflows has played a vital role in promoting Chinese
economic growth, in the meantime, it also has an impact on the environment. This paper
measures scale effect, structure effect, technical effect of FDI on environment quality by
analyzing the panel data from 1997 to 2008 of China's 29 provinces (cities, districts). The
results show FDI inflows has a significant negative impact on China’s environment.
Therefore, this paper suggests that authorities should properly deal with the relationship
between economic development and environmental protection in order to achieve sustainable
development.
© ST. PLUM-BLOSSOM PRESS PTY LTD
1 Introduction
In today's increasingly integrated global economy, China has become the most attractive destination for foreign direct investment
because of a huge potential market. According to statistics, China has signed 659,800 foreign direct investment project agreements
from 1979 to 2008, total amount of contracted foreign investment reaches to1.479401 trillion U.S. dollars, the annually actual
utilized value increased from $ 4,76 million in 1985 to $ 95.253 billion in 2008, increased by 20 times, the actual utilization of
foreign capital amounting to 1.049818 trillion U.S. dollars. Inflow of FDI has played an important role in promoting economic
growth in China, and has gradually become an increasingly important source of capital and output sources. But what can’t be ignored
is that with the fast development of economy, the quality of the environment is declining and the pressure on environment protection
is increasing, especially FDI on environmental quality in China is attracting wide attention: whether the continuous FDI improve the
quality of environment or vise verse. Compared with domestic enterprises, foreign enterprises bring a clearer mode of production or
much more pollution and environmental damage.
2 Review
According to the review of relevant literature on FDI and environmental quality home and abroad, the impact of FDI on the
environment mainly includes scale effect, technical effect, structure effect that coming with FDI.
English edition copyright © ST. PLUM-BLOSSOM PRESS PTY LTD
DOI:10.5503/J.ME.2013.12.017
90
2.1 Scale effect
Grossman-Krueger found that the relationship between environmental pollution and economic development is an inverted U curve,
which is usually called Environmental Kuznets Curve (EKC). He believed that initial economic growth resulted from foreign direct
investment would lead to serious environmental pollution. For example, in the early stages of industrialization, rapid economic
growth inevitably led to excessive consumption of natural resources and a large number of emissions of pollutants, which brought
greater pressure on the environment. However, when the economy develops to a certain scale and income level continually increases
up to a certain level, the so-called "turning point" is appearing. At this time you can invest more material resources in environmental
protection, which will lead to a decline environmental pollution [1]. But Esty’s later found that this inverted U-shaped relationship is
not always suitable for all the pollutants in all countries. It may be affected by a number of structural factors in time and in space,
such as geographic location of host countries, different stages of economic development, etc. The possible result may be that
environment becomes worse and worse over time and there will never have environmental improvement even if the income level has
been increasing [2].
2.2 Technical effect
Some scholars analyzed the technical effects of foreign investment in China on China's environment. By analyzing the data from 100
companies, Wang and Jin found that compared with local Chinese state-owned enterprises & private firms, overseas-funded
companies brought less environmental pollution. They thought that the reason may be that overseas-funded enterprises apply more
advanced and more environmentally friendly technology in the process of production [3]. While concerned about the technical effects
of FDI on environmental protection, some scholars believed that the inflow of foreign investment may have a negative impact on the
environment. Because multinational corporations may continue to use the eliminated technology from their motherland, could lead to
increased pressure on the environment of the host country. Some of township enterprises accept the developed countries’ highpollution equipment in order to attract foreign investment, and it is also true that some developed countries intends to transfer ODS
(ozone depleting substances)’s production and consumption to our country [4]. All these things considered, it is still a controversial
issue whether technical effect of FDI on environmental protection in China is positive or negative.
2.3 Structure effect
The structural effects of FDI on the environment are mainly reflected in two aspects. Firstly, FDI inflows affect the regional
distribution of the host country's economic development Wen Huaide & Liu Yulin’s study suggests that foreign direct investment in
China is extremely uneven, more than 85% in the eastern coastal areas, while only a small portion in the central and western areas.
So technical effect of foreign direct investment is mainly demonstrated in eastern China, and it is not obvious in the central and
western regions. XuHe and others believe that the distribution structure of FBI investment concentrated in the eastern part is likely to
cause these areas to suffer from the serious environmental pollution and ecological degradation [5]. Secondly, FDI inflows affect the
industrial structure of the host country. Zhu Huiming’s study shows that FDI in China mainly goes to the secondary industry,
especially the manufacturing sector, while it is relatively small in primary industry and tertiary industry, which has increased the
unbalanced distribution of China's industrial structure. Nevertheless, the secondary industry is always associated with heavily
polluting industries, so foreign investments develop our economy rapidly as well as pollute our environment heavily [6]. At the same
time some people like Dai Yuqin & OuYang xiaoxun hold the view that the distribution of foreign investment optimizes the structure
of China's industrial distribution. That is to say, clean intensity industry with foreign investment is more productive than pollution
intensity industry, distribution of foreign investment in pollution-intensive industries is better than the distribution of the overall
pollution-intensive industry structure [7].
3 An Empirical Study on FDI and Environmental Problems
From the theoretical research and empirical research mentioned above, it can be found that no convincing conclusion has been drawn
about the relationship between FDI inflow and environmental quality. FDI has both positive and negative effects on the environment.
So in order to understand how FBI has impact on environment, we should make a comprehensive assessment from scale, technical
and structure aspects.
3.1 Data from major Chinese cities
3.1.1 The Pollution Emissions Index. According to the relevant literature, pollution emissions index is an index to measure the degree
of environmental pollution. The pollution emissions can be divided into 3 categories: gas pollution emission, liquid pollution
emission and solid pollution emission. Adopted in this paper are 3 indexes: total volume of waste water discharge (10000 tons); total
volume of industrial waste gas emission (100million cu.m) and volume of industrial solid wastes produced (10000 tons).
3.1.2 The Effect Index. Separately, scale effect will be adopted to measure GDP from every district; structure effect will be adopted
to represent the ratio of capital investment and labor investment; and technical effect will be adopted to represent expenditure for
91
science and technology promotion. All the data are drawn from the Urban Statistic Yearbooks published by China’s State Bureau of
Statistics.
3.2 Estimating the model
In order to examine the relationship between FDI inflows and the pollution emissions in our country, this paper analyzed the panel
data of China's 29 provinces (cities, districts) from 1997 to 2008. Estimate model is as follows:
LnPit=C+ α1Lnfdiit +α2Lngdp it+α3Ln(k/l)it+α4Lnsat it+εit
Where, Pit is the pollution emissions in our country for i city in year t, on behalf of water it, gasit, solidit; fdiit is the FDI inflow index
for i city in year t; gdp it, (k/l)it, satit measures the scale effect, the structure effect and the technical effect separately. ε it is the error
term. α1, α2, α3, α4 are vectors of coefficients to be estimated.
3.3 The process of estimates
This paper carries out the covariance examination, mainly testing the following two hypotheses:
H1: β1=β2=…=βN
H2: α1=α2=…=αN
β1=β2=…=βN
The following is to carry out the variable element model, the variable interception model and invariable parameter model separately.
Obtaining the sum squared resid: S1, S2, S3. On the basis of this, we can calculate two F statistics:
F1=[(S2-S1)/(N-1)k)]/[S1/((NT-N(k+1))]
F2=(S3-S1)/[(N-1)(k+1)]/(S1/NT-N(k+1)]
Comparing F value we get with 2.95, 2.16.at the significant level of 5%, then we decide whether to reject the H1 or H2.
Table 1 Choice model analysis
S1
S2
S3
F1
F2
Lnwater
1.91045
16.24009
174.0748
9.32224
93.33
Lnsolid
32.27246
48.89648
373.94
0.64021
10.9651
Lngas
5.394166
15.05923
51.21317
2.22691
8.79754
Fa
Reject H1
Reject H2
Accept H1
Reject H1
Accept H2
Model
Variable element model
Invariable parameter model
Variable interception model
Material origin: Reorganizes from the reviews analysis.
After deciding on the analysis model, we should carry out the Hausman Test to testify if there is correlation between individual
influence and explanatory variable.
Table 2 Hausamn testing results
Chi-Sq. Statistic
Prob
Suitable the model
Lnwater
18.879211
0.0008
Fixed effects
Lnsolid
15.033537
0.0046
Fixed effects
Lngas
13.612041
0.0086
Random effects
Material origin: Reorganizes from the reviews analysis.
From Table 1 and Table 2, we may draw the conclusion that regression analysis of waste water discharge index, industrial waste gas
emission index and industrial solid wastes produced index suits variable element model and fixed effects analysis, invariable
parameter model and fixed effects analysis and the variable interception model and random effects analysis, respectively.
3.4 Within-city regression results
Table 3 Regression results 1
Lnwater
Lnsoild
Lngas
C
9.801664
LnFDI
0.019823
0.638605
1.295334
0.042495
LnGDP
0.176373
0.620835
0.575091
Ln(K/L)
0.062635
0.862520
0.239913
LnSAT
-0.098582
-0.185642
0.011105
Adjusted R-squared
0.936171
0.6036685
0.921685
Durbin-Watson stat
1.351706
0.891830
1.513745
Material origin: Reorganizes from the reviews analysis.
92
Table 4 Regression results 2
Scale effect
Structure effect
Technical effect
Water
+
+
-
Gas
+
+
-
Solid
+
+
+
Material origin: Reorganizes from the reviews analysis.
As is shown in Table 3 and Table 4, we can draw conclusion that:
(1) In the regression results, the coefficients of LnFDI are positive numbers, which indicates that the present massive FDI inflows
still make our country’s environment quality worse and worse.
(2) The scale effects and structure effects of waste water discharge, industrial waste gas emission and industrial solid wastes are
positive, which means that both scale effect and the structure effect of the foreign capital inflows aggravated the pollution.
(3) As for the technical effect, except for solid waste, the other two indexes are opposite, which shows technical effect is
advantageous to the improvement of environment quality.
4 Conclusion and Policy Suggestion
This paper shows FDI inflows has a significant negative impact on China’s environment by analyzing the panel data of China's 29
provinces (cities, districts) from 1997 to 2008, the foreign capital inflow can bring not only clearer production method, but also the
more pollution emissions and the environment damages.
As for the scale effect, we can know the scale effect of FDI inflows is positive. It means that our country’s FDI inflows are still on
the left side of the environmental kuznets curve. However, it doesn’t mean that in order to improve our environment quality we
should lay stress on increasing the absolute quantity of FDI inflows just to surpass the turning point and reach the right side of
inverted U curve. The scale effect stresses that people will pay more attention to environment quality after increasing income and
more funds will be brought to improve environment quality. However, some environment factors will not be recovered once
destroyed. For instance, the destruction of non-renewable resources and the species extinction will not be improved along with the
people’s high request for environment quality and the anti-pollution power can be improved. In other words, “first pollute the
environment and then take counter-measures” pattern doesn’t have the universality.
The structure effects of FDI inflows show the positive relationship. It indicated that FDI inflow is not good to promote our country
industrial structure. The reason is that FDI inflows are mainly concentrated in eastern area, which leads to serious environment
pollution. As a result, on the basis of strengthening environment construction, we should take more opening measures, which are
suitable for mid-west area, to attract FDI inflows and alleviate the unbalanced situation. Simultaneously, we should make reasonable
policies to bring FDI into cleaner industries in order to improve our industrial structure.
As for the technical effect, the technical effects of FDI inflows show the negative relationship with pollution emission. The
investment of fund in R&D is positive with the industry solid waste and negative with other indexes. This reminds us that enlarging
the investment of fund in R&D and anti-pollution technology innovation will restrain the pollutant emissions effectively. As a
developing country, we should attract green FDI and bring FDI technical effect into play, and introduce more advanced
environmental protection technology into our country.
Acknowledgment:
The authors would like to thank the office of social sciences plan and manage in Shandong Province. Strategic Research on Chinese
Enterprise Foreign Direct Investment (Serial number: 09CJGJ10).
References
[1]. Grossman and A. Krueger. Economic Growth and the Environment [J]. Quarterly Journal of Economies, 1995, (2): 353-371.
[2]. Esty, Daniel, and Michael Porter. Measuring National Environmental Performance and Its Determinants [J]. Yale Law School
and Harvard Business School, 2001, (4): 23-29.
[3]. Wang, H. and Y. Jin. Industrial Ownership and Environmental Performance, Evidence from China. World Bank Policy Research
Working Paper. 2002: 2933-2936.
[4]. XIA Youfu. Research on the Present Situation, Consequence and the Countermeasure Research of Foreign Merchant Invests
Into Pollute Crowded Industrial [J]. Management World. 1999, (3): 109-123. (in Chinese)
[5]. XU He, CHEN Haiying, LIAO Zhuoling. Research of Foreign Direct Investment and Environmental Safety in China. [J].
Journal of China University of Geosciences. 2007, (4): 21-26. (in Chinese)
[6]. ZHU Huiming, HAN Yuqi. The Effect of Foreign Direct Investment on the Industrial Structure in China [J]. Journal of Yantai
University 2003, (2): 10-17. (in Chinese)
93
[7]. DAI Yuqin, OUYANG Xiaoxun. Testing the “Pollution Haven Hypothesis” in China. [J]. Enterprise Technology Development.
2006, (12): 21-25. (in Chinese)
[8]. HE Jie. Pollution Haven Hypothesis and Environmental Impacts of Foreign Direct Investment: The Case of Industrial Emission
of Sulfur Dioxide (SO2) in Chinese [J]. Ecological Economics, 2006, (60): 228-245.
[9]. WEN Huaide, LIU Yulin, WEN Huaiyu. Research on Foreign Direct Investment, Foreign Trade and Environmental Pollution
[J]. Journal of Contemporary Economic 2008, (2): 88-94. (in Chinese)
[10]. Henderson, D. and D. Millimet. Pollution Abatement Costs and Foreign Direct Investment Inflows to United States: A
Nonparametric Reassessment [J]. Review of Economics and Statistics, 2007, (89) 178-183.
94