Pollution haven or pollution halo? Testing direct and spillover effects of FDI

Abstract

FDI has direct effects (effects on foreign-invested firms) and spillover effects (effects on other firms) on pollution emissions. To split out these two effects, this paper divides firms into different clusters based on their industries and regions, then considers the interactions among firms in a cluster following the framework of Hudgens & Halloran (2008). We find that varying ratios of FDI firms within a cluster influence the magnitude of effects on firms' pollution emissions. Specifically, this paper finds inverted “U-shaped” direct effects of FDI on firms' pollution emissions. We also find “U-shaped” spillover effects and total effects: once the proportion of FDI firms within a cluster exceeds a specific threshold, we observe a decline in both spillover effects and total effects of FDI in mitigating pollution emissions.