FOREIGN DIRECT INVESTMENT AND AIR POLLUTION IN CHINA: EVIDENCE FROM CHINESE CITIES

In order to gain deeper insight into the impacts of FDI on the air pollution situation in Chinese cities, I construct a simultaneous system. This system supposes the air pollution indicators to be determined by economic scale, industrial composition and technical characters of a city and in turn, FDI entry can affect the production scale, structure transformation and technical progress in pollution abatement activities. This system is tested for two air pollution cases in China: the annual average concentration of SO2 and total suspended particles TSP). Based on a panel database of 80 cities 1993-2001), the system is estimated by the Generalized Method of Moment GMM) estimator for simultaneous system. The fixed effect estimator and the method of Anderson and Hsiao 1982) are included to take into account the city's specific effect and the potential first-order autocorrelation respectively. The results show that although there exist various channels through which FDI affects pollution, the impacts of FDI on pollution are mainly exerted through scale and technical effects. Corresponding to similar studies, the total environmental impacts of FDI in both pollution cases are proven to be very small.