Emission Reduction Investment, Technology Choice and Business Environmental Performance: Evidence from China’s Foreign Investment Liberalization Reform

Abstract Pollution has become an unavoidable concern as China’s high-quality development is underway. How to reduce pollution is an imperative issue for China to address. Pollution emissions are closely related to factor inputs, production processes and pollution control measures. Are there other forces to cut emissions besides regulatory control? Taking sulfur dioxide as an example, this paper probes into the potential mechanism through which technical efficiency drives pollution reduction in the context of opening to foreign investment. The results reveal that the openness to foreign investment remarkably lowers pollution emissions of firms, with SOEs, large firms and exporters seeing more pronounced pollution reduction effect after opening to foreign investment, while firms in pollution-intensive industries and less regulated areas are weaker in pollution reduction. A look into firm behavior suggests that the openness to foreign investment reduces pollutant emissions by improving technical efficiency rather than by raising investment in pollution control. The pollution reduction effect resulting from the openness is reflected in the improvement of intra-firm emission reduction capacity instead of inter-firm resource reallocation effect, according to an analysis at the aggregate level. This paper concludes that technical efficiency gains are an important tool to advance pollution reduction, and that China must be more flexible in leveraging the pollution reduction effect of other policies regarding technical efficiency to drive its high-quality development that is green.