Analysis of the spatial effect of outward foreign direct investment on air pollution: evidence from China

Abstract

Outward foreign direct investment (OFDI) plays a pivotal role in the strategy to build a high-level and open economy. This research used spatial panel models and data from 30 provinces in China from 2004 to 2017 to empirically analyse the relationship between OFDI and air pollution. The results revealed that, first, China’s air pollution showed two spatial clustering areas: the eastern coastal area (e.g. Zhejiang) and the north-western area (e.g. Xinjiang). Second, with the increase in OFDI, the direct effect on the concentration of respirable suspended particulate matter (PM10) and sulphur dioxide (SO2) was negative, and the direct effect on nitrogen dioxide (NO2) was positive; however, the total effect was negative. An increase of 1% in OFDI would directly decrease the concentrations of PM10 and SO2 by 0.024% and 0.096%, respectively, while NO2 would directly increase by 0.061%, but the total effect of OFDI on the three air pollutants was negative. Third, the environmental Kuznets curve hypothesis existed between economic growth and SO2 and NO2 but not between economic growth and PM10. The spatial panel model results revealed that the spatial spillover effects of air pollutants (i.e. PM10, SO2, and NO2) were 0.494, 0.447 and 0.314, respectively. Moreover, the impact of OFDI on air pollution had significant temporal heterogeneity. To make the results robust, this research conducted a robustness test by replacing the spatial weight matrix and dependent variables. Finally, the conclusion of this article demonstrates the importance of OFDI in improving air pollution, and we could benefit from OFDI. Our research conclusions provide an important reference for policymakers in implementing trade policies and improving air pollution.