Does the environmental tax influence the siting of foreign-invested manufacturing enterprises? Evidence from China

Abstract

Based on unique firm-level microdata, this study adopts the conditional logit model to empirically evaluate the impact of the environmental tax on the siting of foreign-invested manufacturing enterprises. We also explore the trade-offs of the environmental tax by assessing its economic costs and benefits. This study finds that the environmental tax has a statistically significant and negative impact on the siting of foreign-invested enterprises, as verified by a series of robustness checks. This result implies a trade-off of the environmental tax, reducing pollutant emissions at the expense of damaging economic growth. Heterogeneous analysis finds that the siting is remarkably more sensitive for foreign-invested enterprises that are sole-venture, in high-polluting industries, small-scale, or hosted by developing countries. The other trade-off is outlined: although the environmental tax reduces the number of newly registered foreign-invested enterprises, it brings some economic benefits by making the structure of foreign investment cleaner and more advanced.