How foreign direct investment affects CO2 emission levels in the Chinese manufacturing industry: Evidence from panel data

This study explores how inflows of foreign direct investment (FDI) affect a country’s carbon dioxide (CO₂) emission levels. To investigate this relationship, we use panel data (2002–2015) from the 28 subsectors of the Chinese manufacturing sector. We also perform panel framework analysis to verify the characteristics of the panel data before establishing the panel estimator meant to test the relationships between carbon dioxide emissions, FDI inflows, industrial GDP, industry openness, net domestic fixed capital stock and cleaner production. The results of the panel framework analysis suggest the need to eliminate dynamic panel bias and produce more efficient and consistent parameter estimates. To do so, we use System Generalized Method of Moments (GMM) estimators with time dummies. Ultimately, the results of the analysis show that FDI is a positive predictor of environmental quality in the host country, which serves as evidence of the halo effect that FDI reduces CO₂ emission levels. The study also finds evidence that industrial GDP and cleaner production improve environmental quality. However, the domestic capital stock has a negative effect on environmental quality. By showing that past carbon dioxide emissions significantly influence current emissions, our findings demonstrate the importance of consistency and persistence in efforts to reduce those emissions. Accordingly, we discuss some policy implications based on these results.