Effect of environmental regulation on the manufacturing FDI in China: spatial econometric studies

Previous studies on the relationship between foreign direct investment (FDI) and environmental regulation have generally not considered the spatial characteristics. This paper applies spatial econometrics to explore whether or not environmental regulation inhibits the inflow of manufacturing FDI to China. Using a dataset across China's 29 provinces over the period from 2010 to 2015, we examined the spatial autocorrelation pattern about manufacturing FDI. We then used an improved spatial econometric model to explore the effect of environmental regulation on manufacturing FDI, incorporating other determinants of FDI, including the level of economic development, the degree of industrialization and the manufacturing labor cost. Our study reveals that manufacturing FDI exhibits clear spatial autocorrelation and regional agglomeration characteristics. Furthermore, the inhibitory effect of environmental regulation on manufacturing FDI inflow is gradually increasing with the passage of two stages, which confirms the "pollution shelter" hypothesis in China. We also find positive effects of the level of economic development and the industrialization degree on the manufacturing FDI inflow while, as expected, the manufacturing labor cost is found to be negatively correlated with FDI inflow.