Foreign direct investment and environmental pollution: A fiscal decentralization perspective

Based on the panel data of 272 prefecture-level cities in China from 2003 to 2017, this study used the comprehensive index of environmental pollution to measure local environmental pollution, and employed the panel simultaneous equation to analyze the relationship between fiscal decentralization, foreign direct investment, and environmental pollution. The results showed that environmental pollution has the characteristics of time inertia and positive spatial spillover; fiscal decentralization and local government competition have a significant “race to bottom” effect on environmental pollution; and with the increase of fiscal decentralization, environmental quality will deteriorate. In the interaction between foreign direct investment and environmental pollution under the system of fiscal decentralization, foreign direct investment aggravates environmental pollution. Meanwhile, if the environmental pollution in a given region is serious, the willingness of foreign investors to invest therein is lessened to a certain extent. Based on the conditions in China, certain policy suggestions are put forward to increase environmental quality, such as building a comprehensive performance assessment mechanism that includes environmental quality, optimizing the decentralization system, and raising the threshold of foreign investment access.