Impact of environmental regulation on foreign direct investment of Chinese manufacturing firms: Based on the dual perspectives of home and host countries

The impact of environmental regulation (ER) on foreign direct investment (FDI) and its underlying mechanisms have recently received widespread attention from scholars. This study takes 2401 Chinese manufacturing listed firms as research objects, and designs and conducts two studies that examine the link between the ER of the home country, the ER of the host country, and FDI. The first research design analyzes the impact of China's ER on firms' overseas investment strategies using the fixed effect model and the logit model. Our findings are as follow: (1) The baseline estimates show that the ER of China significantly promoted the speed of firms going global, but had a negative impact on their probability of going global. (2) The results of the mechanism test indicate that there were both mediating and suppressing effects in compliance costs and innovation compensation. (3) Regional heterogeneity analysis revealed that in the Eastern region, ER positively impacts investment Speed but not OFDI. Conversely, in the Central and Western regions, ER negatively affects OFDI but not Speed. The second research design analyzes the impact of host country ER on the inflow of China's FDI into the host countries. The results show that: (1) The ER of the host country had a significant positive impact on China's FDI inflow, and the innovation capacity of the host country played a suppressing effect in the relationship between the two. (2) The heterogeneity analysis reveals that host country ER stringency and income level impact the mediation effect of innovation capacity on Chinese FDI inflows, with no significant “pollution haven” effect observed, and innovation capacity exhibiting a suppressing effect in countries with looser ER and non-high-income countries. (3) There was heterogeneity in the impact of the host country ER on FDI with different characteristics. The ER of the host country was more attractive to FDI from provinces with loose ER in China, FDI of private firms, FDI from low polluting industries, and FDI from high-tech industries. This study contributes to the research on ER and FDI, and provides implications for the formulation of environmental policies and foreign investment policies in developing countries.