Reevaluating the impact of FDI on industrial pollution: New evidence from microdata

We revisit the debate on the environmental impact of FDI by leveraging two comprehensive firm-level datasets and address identification issues via an instrumental variable difference-in-differences approach upon China's accession to the World Trade Organization. We examine two under-explored factors in the literature by showing that a higher FDI share in the industrial output significantly decreases firm pollution intensity beyond the effect of productivity gains and stricter environmental regulations. The impact of FDI varies across pollutants, which we relate to policy priorities. Consistent with the technology spillover mechanism, we show that the effect is more pronounced for firms in high-competition industries, exposed to higher local FDI inflows, with higher absorptive capacities, and works through both domestic and foreign-invested firms. The pollution-intensive industries have made more environmental progress. Our findings suggest a more nuanced role of FDI in pollution prevention and offer new insights for policy makers.