Foreign Direct Investment’s Impact on China’s Economic Growth, Technological Innovation and Pollution

Abstract

In recent years, China has gradually become one of the countries with the largest levels of foreign direct investment (FDI). FDI has played a significant role in promoting Chinese economic development, and the FDI technology spillover effect is one of the core forces driving China towards reaching new growth milestones. Therefore, due to the country’s interest in development, there is competition for FDI throughout China. However, the existing imperfect environmental protection system cannot prevent FDI from flowing into China’s highly polluting and resource-intensive industrial chain, possibly causing serious environmental problems. Therefore, the topic of properly introducing foreign capital to promote development and effectively end China’s current environmental pollution crisis has become a research focus. To explore FDI’s impact on China’s economic growth, technological innovation, and environmental pollution, we use Chinese provincial panel data for 2004–2016 to construct a dynamic panel simultaneous-equation model. Considering the interrelationships between the equations, we construct economic models of economic growth, technological innovation, and pollution emissions, and incorporate them into the same research system for generalized method of moments (GMM) estimation. Our results show that FDI has a significant and positive direct impact on China’s economic growth and technological innovation, and can furthermore have a significant pull effect on the domestic economy through the backward spillover channel. At the same time, FDI has a direct and significant impact on the increase in regional waste-water discharge, while exhibiting a pollution halo effect on the emission of sulfur dioxide (SO2) and chemical oxygen demand (COD) emissions directly. In addition, we observe “benign feedback mechanism” between technological innovation output and these three types of pollution, namely SO2 emission, COD emissions, and ammonia and nitrogen discharge.