Essays on growth, foreign direct investment, and industrial pollution

Abstract

This thesis consists of three chapters concerning economic growth, foreign direct investment (FDI), and industrial pollution. The first two chapters examine the cause of the green shift reversal of US manufacturing. The third chapter discusses the role of FDI in affecting China's eco-efficiency. The first chapter documents the pollution changes caused by the shift in US industrial composition during 1987-2009 by applying the index decomposition method. It is found that dirty industries contracted relative to clean industries ("green shift") in the 1990s but reversed to expand in the 2000s. Four hypotheses are proposed to explain the green shift reversal. Evidences show that both US domestic environmental regulation and US-China trade have strong explanatory potential. The second chapter proposes an induced innovation theory to rationalize the green shift reversal. It introduces directed technical change into a twoindustry growth model to investigate the dynamic impacts of environmental policy on industrial composition. The model characterizes the conditions under which regulatory tightening will induce a green shift reversal and direct innovation efforts to improve abatement technology. The green shift occurs only if the environmental regulation is sufficiently stringent. It is also found that innovation direction is jointly determined by stringency and implementation timing of environmental policy. The third chapter identifies the contribution of FDI entry to the 5-fold gain in eco-efficiency in China's manufacturing during 1995-2006. We refine the conventional index decomposition method to differentiate the impacts of foreign-invested enterprises (FIEs) from those of domestic firms. Applying the refined method to China's SO2 emissions, we find that (i) both FIEs and domestic firms shifted production toward cleaner industries; (ii) the better production or abatement techniques of FIEs explain 23% of China's ecoefficiency gain; and (iii) another 69% of the gain is contributed by progress in the production or abatement techniques of domestic firms, which is positively associated with horizontal and vertical spillovers from FIEs. Findings (ii) and (iii) lend support to the Pollution Halo Hypothesis.

Date of Award	14 Feb 2014
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Chia Hui LU (Supervisor) & Yong WANG (Co-supervisor)