Foreign divestment is attracting increasing attention, but its implication for environmental pollution remains underexplored. This paper aims to analyse how foreign divestment influences environmental pollution in the host country.
Using matched production and pollution data for Chinese industrial enterprises from 2007 to 2014, this study investigates horizontal, forward-linked and backward-linked spillover effects of foreign divestment on the environmental pollution of domestic firms.
The results of this study show that foreign divestment generates significant emission-reduction spillovers for domestic firms, mainly driven by backward linkages. The exit of downstream foreign-invested enterprises creates a negative demand shock that directly lowers the pollution intensity of upstream domestic suppliers, lending support to the pollution haven hypothesis. In addition, the environmental performance of local firms responds differently to foreign divestment depending on the modes of divestment, the origin of divested firms, the ownership structure of domestic firms and industry input factor intensity.
These findings contribute to a more nuanced understanding of the environmental benefits associated with foreign direct investment, as well as the multifaceted effects of foreign divestment.
