Energy intensity and foreign direct investment: A Chinese city-level study

- Energy intensity and city-level per capita income in China are related.
- We find an inverted U relationship.
- The majority of cities are on the downward slope.
- FDI appears to reduce energy intensity.
- The FDI effect varies by geographic area.

In this paper we investigate the relationship between the energy intensity of Chinese cities and the location of foreign firms employing a unique dataset of 206 of the largest prefecture-level cities between 2005 and 2008. Our results reveal a non linear inverted-U shaped relationship between energy intensity and city-level per capita income with the majority of cities on the downward slope of the curve. We also find evidence of a significant and negative relationship between the foreign direct investment (FDI) flows into a city and energy intensity. However, this effect varies by geographic location reflecting differences in the ability of regions to absorb and benefit from environmental spillovers. The relatively small economic effect of FDI can in part explained by the propensity for foreign firms to invest in energy intensive sectors coupled with the trend for China to invest heavily in capital intensive industries.