‘Going global’ and pollution in home country: Evidence from Chinese industrial firms

Abstract

The relationship between international investment and the environment is always concerned around the world, but the literature mainly focuses on the impact of foreign direct investment (FDI) (especially from developed countries to developing countries). Currently, many developing countries have regarded outward foreign direct investment (OFDI) as a critical task of economic development and encourage firms to ‘Going global’. After OFDI, how do firms' pollution emissions change? In this study, we employ the data of Chinese industrial firms to empirically answer this question. In particular, we combine inverse probability weighted matching with a difference-in-difference approach to identify the causal effect of OFDI on firm-level pollution emissions. Our result indicates that OFDI leads to the reduction in both emission intensity and emission levels. This pollution reduction is driven by improving abatement technology and decreasing energy intensity. It potentially implies that OFDI reduces pollution emissions mainly through the ‘reverse technology spillover’ effect rather than ‘pollution transfer’ effect. In addition, pollution reductions caused by OFDI are prominent for local production OFDI and resource exploitation OFDI, OFDI to high-income countries as well as capital-intensive industries. Overall, this study not only provides an initial evidence for the relationship between OFDI and the environment at the firm level but also provides enlightenments for international investment and sustainable development.