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| Environmental Regulation and the Change in Foreign Direct Investment in China: An Empirical Study Based on DEA Multiple Decomposition |
| WANG Bing, XIAO Wenwei
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| School of Economics, Jinan University |
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Abstract Since the reform and opening up of China, the openness and investment environment have continuously improved and the sustained rapid economic growth has led to China gradually becoming a major destination for global transnational investment. However, the Chinese economy is entering a “new normal,” with overcapacity and environmental pollution becoming increasingly prominent. In line with the principle that “lucid waters and lush mountains are invaluable assets,” building an ecological civilization is the millennium plan for the sustainable development of the Chinese nation, and the party's 19th National Congress report clearly proposes to implement stringent environmental protection. In addition, global foreign direct investment (FDI) has generally declined and the international investment environment is not encouraging. Although foreign investment in mainland China has maintained growth, the growth rate has declined. In the face of the unequal international investment environment and increasingly serious domestic environmental problems, it is of great practical significance to study the impact of environmental regulation on FDI in light of the current state of the Chinese economy.
This paper uses data envelopment analysis to explore the factors influencing China's FDI changes under environmental regulation. Using the sub-vector distance function of FDI, we define the production technology of environmental and non-environmental regulation to construct an index of the cost effect of environmental regulation and measure the cost of environmental regulation of 30 provinces in China over the 1999–2015 period. Furthermore, we decompose the changes in actual FDI and test the factors influencing the actual FDI changes under environmental regulations using a counterfactual test. We use the input and output data from China's 30 provinces (except Tibet) for 1998–2015, including four input data, three good outputs, and two bad outputs. The data come mainly from the statistical yearbook.
The main conclusions of this paper are as follows. After 2001, the cost of environmental regulation for all provinces in China showed an overall upward trend that was most obvious in the eastern region and least so in the northeast. Under environmental regulation the actual FDI in all provinces first accelerated and then slowed down. Prior to 2015, secondary industries attracted the most FDI. From the beginning of 2014, tertiary industries showed a significant increase in FDI. Thus, the “supply-side structural reform” has achieved initial results and promoted the optimization and upgrading of China's industrial structure, with the tertiary industry offering great potential for China's economic development. However, we must continue to accelerate structural adjustment. The counterfactual test shows that the factors affecting the change in FDI in different periods are not the same, but as the intensity of reform and opening up increased, the influence of total factor productivity and industrial structure on the distribution of FDI was significantly enhanced. Therefore, under the “new normal” economy, we still require steady growth to effectively promote supply-side structural reform and unswervingly expand the reform and opening up. The literature has mostly used measurement models and needs specific functional forms. There have also been many endogenous problems and subjective choices of instrumental variables. In addition, the data related to environmental regulation were generally not accessible, and the mechanism of impact is still unclear.
The contribution of this paper is the construction of a correlation index using the sub-vector distance function of FDI to comprehensively decompose the changes in FDI under environmental regulation without specific data related to environmental regulation while avoiding the problem of endogeneity. The paper not only links the changes in FDI to total factor productivity and other input factors, but also analyzes the impact of China's economic structural change on FDI. Further research directions from this paper would be to construct an environmental regulation cost index for various industries, decompose the FDI inflows of various industries, analyze the factors influencing FDI inflows in various industries, and make recommendations on the introduction of foreign capital under the new opening-up pattern.
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Received: 13 April 2018
Published: 01 April 2019
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