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Governance, financial development and China's outward foreign direct investment.

ABSTRACT: Deeply investigating the relationship between governance, financial development, and outward foreign direct investment (OFDI) is beneficial to formulating effective policies to accelerate Chinese firms' pace of overseas expansion. Based on the theoretical mechanism analysis, this paper empirically analyzes the impact of Asian governance and financial development on China's OFDI using the panel data of 37 Asian countries from 2003 to 2017. The results show that the host country governance has a negative and statistically significant impact on China's direct investment in Asia. The conclusion remains valid even after overcoming the interference of endogenous and economic cycle fluctuations. Moreover, using the mediating effect model, we find that financial development is an important channel through which host country governance affects China's OFDI. In further discussion, the findings suggest that with the scale of OFDI expanding, the role of governance takes an inverted "U" shape, and the "Belt and Road" initiative (BRI) weakens the negative impact of governance quality on China's OFDI. Furthermore, governance has shown more remarkable restraint on China's OFDI in neighboring, coastal, and low-income countries in the heterogeneity test. From the perspective of host country governance, this paper provides more specific guidance to formulate China's direct investment policy in Asia.

SUBMITTER: Gao C

PROVIDER: S-EPMC9246154 | biostudies-literature |

REPOSITORIES: biostudies-literature

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Project description:Highlights • This paper studies the relationship between FDI and carbon emissions.• It considers the innovation, regulation, and efficiency levels of the host countries.• A Panel Autoregressive Distributed Lag was applied on 21 countries divided by income level, for a period from 2001 to 2017.• FDI decreases emissions in high-income countries, while increasing them in the short run in middle-income countries, which supports the Pollution Haven Hypothesis.• This paper reveals that regulatory measures seem to be less effective in reducing emissions in high-income countries. Besides bringing countries closer, the effects of globalization can help increase the production of goods and services, and foster economic growth. Foreign direct investment (FDI) is one of the processes of globalization. One aspect of globalization that has piqued the interest of economists, is the transfer of polluting industries between countries. A principal factor in this are discrepancies of environmental regulations, and these have also been instrumental in a failure to control pollution worldwide. With this impasse in mind, a Panel Autoregressive Distributed Lag was applied to evaluate the impacts of FDI on the carbon dioxide emissions of 21 countries divided by income level, for a period from 2001 to 2017. This methodology allowed the analysis of the resulting dynamics of pollution into the short-run and long-run. The characteristics of efficiency, innovation, and regulation are crucial to better understand the consequences of flows in FDI. Regulation seems to increase pollution in high-income countries, which merits further discussion. FDI decreases emissions in high-income countries, while increasing them in the short-run in middle-income countries, which supports the Pollution Haven Hypothesis. Nonetheless, the capacity of middle-income countries to absorb technology is crucial for them to benefit in the long-run. Trade openness is also highly influenced by environmental regulation in middle-income countries. Since our aim is to understand the transfer of polluting industries, an analysis of emissions from the industrial sector provided a robustness check. It also revealed that policymakers do not seem to be paying sufficient attention to innovation and controlling the environmental degradation that this sector causes.

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Governance, financial development and China's outward foreign direct investment.

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