Does foreign direct investment drive environmental degradation in China? An empirical study based on air quality index from a spatial perspective

A growing literature on the pollution haven hypothesis has surged for decades. In this paper, we employ a city-level data set of 150 Chinese cities in 2014, and take spatial spillovers into account by using spatial econometric models, to investigate whether foreign capital inflows drive environmental degradation in China. The results suggest that foreign direct investment is negatively related to air pollution in China, indicating evidence of pollution halo hypothesis. Moreover, foreign direct investment has significant spatial technological spillovers, improving air quality in China. This study also finds that there is no evidence of an inverted U-shaped curve between income and air pollution. As income levels increase, air quality continues to worsen. The development of the tertiary industry is found to have a positive effect on air pollution. Densely populated cities tend to demand for better environmental quality. From the above analysis, it follows that policies handles are urgently needed to improve air quality in China.