Effect of FDI on pollution in China: New insights based on wavelet approach

By applying the wavelet tool, this study examines the effect of foreign direct investment (FDI) on pollution in China, for the period 1982 to 2016. Carbon dioxide and sulfur dioxide emissions are used as pollution variables. The results reveal that FDI positively affected pollution at high frequency (short term) during the 1980s and after 2000, and at low frequency (long term) but not at medium frequency (medium term) for the entire time period. It demonstrates that FDI increases pollution both in the short and long term, but not in the medium term. It indicates that FDI has created pollution havens in China. For robustness analysis, spectral causality test was applied. The results of this causality test indicate that FDI causes CO₂ emissions both in the short-run and long-run. This suggests that in China FDI predicts CO₂ emissions. Thus, stringent environmental rules are required to restrict the inflows of foreign dirty industries in China.