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.

Keywords:

• environmental tax
• foreign-invested enterprise
• siting
• heterogeneous effect
• China

Acknowledgement

We highly appreciate the constructive comments of three anonymous reviewers.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

Data are available from the authors upon request.

Notes

1 The policy of “two exemptions and three reductions” means that for foreign-invested enterprises with an operating period of more than 10 years, the corporate tax is exempted for the first two years and reduced by half for the next three years, after the first year that it gains profits.

2 These measures included the restriction of high-polluting industries’ output, the setting of the national and provincial emission reduction targets, the real-time monitoring of pollution levels, the control zones for SO₂ and acid rain, and the central environmental protection supervision and inspection system.

3 The eight industries included electricity, petrochemical, chemical, building material, iron and steel, non-ferrous metal, paper-making, and civil aviation.

Additional information

Funding

The study is supported by the major project of the China National Social Science Foundation (20&ZD092; 21BJY013), the National Natural Science Foundation of China (71903014) and the Beijing Natural Science Foundation (9222016).