FOREIGN DIRECT INVESTMENT AND AIR POLLUTION IN CHINA: EVIDENCE FROM THE GLOBAL FINANCIAL CRISIS

China has been notable for both its rapidly growing foreign direct investment (FDI) and environmental pollution in recent decades. Using the exogenous shock of the 2008 financial crisis as a natural experiment, we construct instrumental variables for FDI by distinguishing between the decrease in FDI in coastal cities and non-coastal cities. Based on panel data from Chinese prefecture-level cities, we study the impact of FDI on air pollution in China. The results show that FDI has significantly worsened air quality in China and that the effect is more significant in big cities. FDI in China worsens air quality through increased pollution emissions and resource depletion.