Pollution abatement cost savings and FDI inflows to polluting sectors in China

This paper uses a nested logit model to examine whether potential pollution abatement cost savings adjusted by institutional and socio-economic conditions influence the location choices of Foreign Direct Investment (FDI) among Chinese provinces. It incorporates individual polluting firms’ characteristics instead of looking only at location attributes. The results show that (i) FDI firms in polluting industries tend to locate in provinces with higher potential abatement costs savings adjusted for local environmental regulation; (ii) relatively dirtier firms are more likely to locate in less developed provinces or provinces with fewer similar polluting industries; (iii) firms in pollution-intensive industries are more sensitive to regulation and development status than firms in non-polluting industries; and (iv) firms tend to locate in provinces where they have more bargaining power with local governments. These findings suggest the existence of domestic pollution havens in China.