Global Producers in China: Empirical Evidence on FDI, Product-Mix and Emissions

Against the backdrop of supply shortages during the COVID-19 pandemic and rising geopolitical risks, the issue of production reshoring has attracted increasing attention in EU policy debates. Some experts advise for a partial or complete withdrawal from locations such as China. But others who are less pessimistic, argue for the retention of production hubs. Unconnected with this debate, there is a parallel conversation about the environment where the decision to manufacture products at home (e.g., Germany) or overseas (e.g., China) is seen as key to reducing (or increasing) the amount of global emissions and pollution.

Many governments continue to expend vast amounts of time, effort and taxpayer’s budget in encouraging multinationals to invest in their countries. Yet, does the benefit of foreign direct investment (FDI) come at a cost to the environment? This question does not appear to have been adequately answered in existing empirical studies. Particularly for China, one of the most attractive FDI host countries worldwide, we know very little about the link between FDI and environmental costs. This fact is worrying, considering that China is Number One Producer of global Carbon dioxide (CO₂) emissions.

Our research project aims at filling this gap by analyzing the link between foreign investment and environmental costs, focusing on firms – domestic and foreign multinational enterprises operating in China. More concretely, we focus on the following research questions:

(1) How have the emissions of the Greenhouse Gas and other pollutants evolved in China over time?

(2) How has foreign investment affected these emissions and the abatement of the pollutants?

(3) How environmentally clean are the production technologies used by foreign affiliates?

(4) What is the environmental footprint (e.g., severity of water, air, soil pollution) of foreign affiliates compared to local firms?

(5) How does the mix of products change, following the takeover of a host-country firm?

Our research aims at exploring new insights into the role of foreign investment – its link to pollution emissions and also its link to environmental abatement – for the world’s second largest economy and the largest CO₂ emitter. In so doing, our research will extend existing empirical knowledge, serving as a relevant evidence base for shaping policy which deals with the relation between FDI and environment protection.

Project Partners

Kiel Institute for the World Economy (IfW), Germany

University of Dundee, UK

Zhejiang University, China