The effects of environmental regulation on outward foreign direct investment’s reverse green technology spillover: Crowding out or facilitation?

Abstract

This study provided statistical evidence for the moderating effect of environmental regulations on the reverse green technology spillover of outward foreign direct investment (OFDI). Static and dynamic panel data model and three estimation methods were used to control for potential endogeneity and ensure the robustness of the results. Chinese provincial-level data were used in the empirical study to reveal the existence, nature, and regional heterogeneity of the moderating effect of environmental regulations. The results showed that environmental regulations served as a moderator to facilitate the reverse green technology spillover of OFDI from the national perspective. After switching to the regional perspective, environmental regulations changed into a moderator that produced a significant crowding-out effect on the reverse green technology spillover of OFDI in eastern regions. In contrast, in the mid-west regions, environmental regulations had no significant moderating effect on this knowledge transfer process. Taken together, our findings indicate that the reverse green technology spillover brought by OFDI can be amplified through well-designed environmental regulations and improved knowledge transfer ability of OFDI.

Introduction

The continuous development of the world economy has led to environmental problems that threaten the lives of human beings. These problems have drawn international attention. To address environmental problems in China, the Chinese government has enacted several environmental regulations since the 1970s. According to the China Environment Protection Database (Laws and regulations, 2020), 8210 laws and regulations related to environmental protection have been published from 1970 to the present. Of these, nearly 40% were published after 2007. Environmental protection is becoming increasingly intensive and environmental regulations are becoming stricter.

The strengthening of environmental regulations reduces environmental contamination, impacts economic development patterns, and accelerates green technology progress. The crucial role of environmental regulation has been discussed since the 1990s. Porter (1991), Porter and Van de Linde (1995) proposed that well-designed environmental regulations can protect the environment and accelerate technology innovation, offsetting compliance costs. This hypothesis has triggered a wide debate on the impact of environmental regulation, with some researchers further focusing on its impacts on green technology innovation (Chan et al., 2016; Horbach et al., 2012; Hu et al., 2018; Kesidou and Demirel, 2012; Xie et al., 2017). Kneller and Manderson (2012) proposed that environmental regulation may be a key force driving green technology innovation. Given that green innovation can serve as an effective instrument for improving the ecological environment, some researchers have further proposed that the influence of environmental regulation on green technology innovation could be a dominant factor for achieving sustainable ecological and economic development (Brunnermeier and Cohen, 2003; Rennings, 2000; Rennings et al., 2006).

Environmental regulations can influence green technology innovation in many ways. Outward foreign direct investment (OFDI) is one source of pivotal technology (Buckley et al., 2007; Pathak et al., 2013). Advanced foreign technology can be obtained and transferred to the receiving or “home” country through OFDI. This technology transfer process is referred to as reverse technology spillover (Child and Rodrigues, 2005; Li et al., 2012; Pathak et al., 2013). Eco-technology can also be transferred through OFDI, accelerating green innovation in the receiving country (Zhou et al., 2019). This process is known as the reverse green technology spillover effect of OFDI. However, eco-technology seeking is not the main motivation for participating in OFDI (Chen et al., 2012; Li et al., 2016; Luo and Tung, 2007, 2018), unless the investor is under pressure to meet specific environmental protection standards. Environmental regulations produce this type of pressure. When pressured by environmental regulations, the investor tends to acquire advanced eco-technology in the process of OFDI, and then use the technology to compensate for emission disadvantages in the home country. Thus environmental regulation may play a moderating effect in the reverse technology spillover effect of OFDI.

Most studies that have explored the role of environmental regulation have been set against a broad background (Porter and Van de Linde, 1995; Ramanathan et al., 2017; Wang et al., 2019) or have explored the impacts on green technology innovation (Horbach et al., 2012; Hu et al., 2018; Kesidou and Demirel, 2012). However, very little attention has been given to the specific impact of environmental regulations on green innovation in the reverse green technology spillover of OFDI (Zhou et al., 2019). Actually, the reverse green technology spillover effect of OFDI can provide the home country with the opportunity to learn-by-doing, saving research and development (R&D) investment outlay. However, the reverse green technology spillover effect brought about by OFDI is an implicit process that is difficult to control and adjust. If environmental regulations do have a moderating effect, they can be an important means to adjust the knowledge transfer process of OFDI. This leads to the first question: Is there a positive or negative moderating effect of environmental regulation in the reverse green technology spillover process of OFDI?

Furthermore, different regions may respond differently to the same level of environmental regulation stringency (ERS). This may be due to significant regional differences in economic development, investment preferences, industrial structure, and the effectiveness of environmental monitoring and enforcement. Further, the regional distribution of OFDI has been found to be uneven and heterogeneous, which could result in diverse technology spillover effects (Cheung and Ping, 2004; Li et al., 2016, 2018). Thus, the eco-innovations transferred through OFDI could be spatially heterogeneous under the influence of environmental regulations. So far, we believe few studies have assessed the regional heterogeneity of the possible moderating effects. Accordingly, this leads to this paper’s second question: how does the effect of environmental regulation on the reverse green technology spillover effect of OFDI vary from the regional perspective?

To address these research questions, this paper integrated the static and dynamic panel data model and analyzed provincial panel data for 29 Chinese provinces from 2007 to 2016. Multiple estimation methods were applied, including Ordinary Least Squares (OLS), Differenced Generalized Method of Moments (GMM), and System GMM. These approaches addressed the endogeneity issue and ensured the robustness of the empirical estimates. The empirical results demonstrated the existence and inherent nature of the moderating effect of environmental regulations on the reverse green technology spillover effect of OFDI in China. The study also captured the regional heterogeneity of the moderating effect of environmental regulations, allowing an in-depth analysis of differentiated green technology innovation process and the development of relevant policy implications.

This paper makes three key contributions to the field. First, the study integrated environmental regulation, OFDI, and green technology innovation into a unified analysis framework, to better reveal the internal mechanisms involved. Second, the study applied the number of granted green patents to represent green technology innovation performance. This maximized the accuracy in evaluating both innovation and research and development (R&D) performance. Third, the study conducted sub-regional analyses to describe the features of the moderating effects of environmental regulation. The empirical results provided supportive evidence for the distortion produced by regional heterogeneity. This emphasized the importance of integrating regional heterogeneity into the analysis paradigm when evaluating the impacts of environmental regulation.

The rest of this paper is organized as follows. Section 2 reviews earlier studies. Section 3 describes data sources, regression models, estimation methods, and the selection of variables. Section 4 presents the empirical results. Section 5 concludes the study with important findings and policy implications.