2013 6th International Conference on Information Management, Innovation Management and Industrial Engineering Analysis of Relationship between FDI and Environment in Liaoning Province Li Cheng School of Economics and Management Shenyang Aerospace University Shenyang, P R China sychengli@163.com natural resources consumption and environmental degradation, leading to more industrial pollution and environmental degradation Third, environmental effect of FDI could decompose Comprehensive environmental effect depends on the combined effect of all kinds Grossman and Krueger are the first to let the environment effect decompose into scale effect, structure effect and technology effect [3] Panayotou added into four effects, include structure effect, scale effect, technology effect and the control effect [4] With the expanding of openness in China, some domestic scholars also begin to pay close attention to environmental problems brought by foreign direct investment Wenbing Sha measured the environmental effect of foreign direct investment (FDI) with panel data of China's 30 provinces (cities, districts) from 1999 to 2004 Results showed that foreign direct investment had significant negative effects on our country's ecological environment [5] Shenbiao Pan and Miaozhi Yu used the test analysis on the relationship between foreign direct investment and environmental pollution in Jiangsu, Zhejiang and Shanghai [6] Ruiyao Ying and Li Zhou showed foreign direct investment in China is the Granger cause of industrial pollution based on the empirical analysis of the “pollution haven” [7] Jie He used the panel data of 29 provinces and cities in China, taking sulfur dioxide as index of pollution of the environment found that unit increase of the absorption of FDI, can lead to 0.098 units increase of industrial SO2 emissions [8] In Chinese academic circle, the research about the environmental problems brought by foreign direct investment (FDI) mainly focuses on the entire country from a macro point of view, and the southeast coastal developed area The environmental problems brought by the foreign direct investment in northeast China are paid less attention However, with the propulsion of northeast old industrial base revitalization strategy and under the control of industrial gradient shift rules, there have been more and more foreign enterprises, especially the pollution intensive enterprises, entering the region in northeast China On one hand, the foreign capital promoted the economic development of China's northeast, but on the other hand, can also bring the pollution of the environment Liaoning, as China's important energy and raw materials base, is confronted with the worsening environmental problems Therefore, it is more theoretical and practical significant to study the related problems of FDI and environmental pollution in Liaoning province Abstract—Taking Liaoning province as an example, this paper discussed the relationship between foreign direct investment (FDI) and environment through the granger causality test and relationship test The results showed that FDI in Liaoning province increased from 248 million dollars in 1990 to 15.444 billion dollars in 2009 with an average growth rate of 22.95% The actual FDI mainly focused on the second industry, especially in manufacturing, with an average proportion of 50% FDI exerted an important influence on industrial emissions If FDI increased by 1%, industrial waste gas emissions would increased by 0.82% Finally, the government should promote coordinated development between FDI and environment by optimizing foreign investment environment, adjusting the industrial investment structure and improving foreign environmental laws and regulations and strengthening environmental law enforcement in Liaoning province Keywords-FDI; causality test enviroment effect; I Liaoning province; INTRODUCTION With the advancement of global economic integration process, flow in such as capital, raw materials and labor from country to country is more and more frequent, and the trade and investment activities between countries or areas are more frequently In 2009, China's GDP reached 34.34647 trillion yuan, with annual import and export of goods of $2.20754 trillion and FDI of $94.065 billion, and China has become the first of the developing countries in attracting foreign capital But, along with the growing awareness of environmental protection, foreign direct investment and environmental pollution problems are becoming more and more concerned from society So far, there are mainly three kinds of views on relationship between FDI and environment pollution by foreign scholars’ research: First, foreign direct investment in the host country's environmental impact is favorable Birdsall and Wheeler believed foreign trade and FDI in developing countries provide motive and opportunity to adopt new technology, thereby improving the quality of the host country environment [1] Eskeland and Harrison found that foreign companies’ emissions are less than domestic enterprises [2] Second, FDI's impact on the environment is unfavorable It includes two kinds of views One is the “pollution haven” hypothesis It states the pollution industries transfer to developing countries with less environment regulation which become “pollution haven” and that FDI will increase the host country's environment pollution The other is that FDI promotes economic expansion of the host country, which accelerates speed of 978-1-4799-0245-3/13/$31.00 ©2013 IEEE 17 relationship between all kinds of economic phenomena using the statistical method, i.e “Granger causality test” [9][10] The idea of Granger causality test is: for the two economic variables X and Y , the forecast effect is better than by single past information of Y under the condition of containing the past information about X and Y at the same time, which means variable X improves the prediction precision of Y , so it can be concluded that X is the Granger cause of Y ’s change Specific testing method is: test II EMPIRICAL ANALYSIS OF THE RELATIONSHIP BETWEEN FDI AND ENVIRONMENT IN LIAONING PROVINCE In recent years, the number of actual use of foreign capital in Liaoning province is on a rising trend year by year It can be seen from Tab that the actual foreign direct investment mainly concentrated in the second industry, especially in manufacturing industry with the proportion of about 50% on average from 2000 to 2009 In recent years, the share of foreign direct investment in the third industry appeared rising trend year by year accounting for half with the second industry By the end of 2009, the province's actual utilized foreign direct investment reached $15.444 billion with a 28.49% increase from the previous year Actual use of foreign direct investment of manufacturing was $6.959 billion, increased by 32.36% TABLE I E i (i 1,2, , m) in (1), this assumption is equivalent to “ X is not the cause of Y ’s change” If the testing results E (i 1,2, , m) , we can reject the null hypothesis of i reject the hypothesis " X is not the cause of Y ’s change", DISTRIBUTION OF FOREIGN DIRECT INVESTMENT INDUSTRY IN LIAONING PROVINCE year Primary industry Secondary industry Tertiary industry Manufacturing industry real estate 2000 2.01% 66.50% 31.49% 59.22% 14.53% 2001 3.23% 65.12% 31.64% 59.37% 15.64% 2002 2.64% 65.15% 32.21% 59.28% 15.88% 2003 2.54% 65.91% 31.54% 63.18% 18.02% 2004 3.24% 59.42% 37.34% 56.97% 22.02% 2005 0.66% 50.61% 48.74% 49.05% 27.38% 2006 0.90% 59.55% 39.55% 57.30% 25.44% 2007 0.95% 41.47% 57.58% 39.98% 45.05% 2008 1.31% 46.99% 51.69% 43.73% 37.30% 2009 0.92% 47.57% 51.51% 45.05% Data source: Liaoning province statistical yearbook, 2009, 22.87% and come to the conclusion that X is the Granger cause of change of Y ; similarly, you can test E j ( j 1,2, , m) in (2), to find whether there is Granger causality y y m m i i m m D ¦ D i y t i ¦ E i xt i H t ˄1˅ D ¦ D j y t j ¦ E j xt j H t ˄2˅ This essay applied Eviews statistical software to carry on Granger test the relationship between the FDI and industrial waste gas in Liaoning province, with taking 10% as significance level and taking from to as lag period We can get results from Tab Combined with F test and P values, it can be seen from Tab 2, when lag period is from to 2, foreign direct investment in Liaoning province has significant effects on industrial waste gas emissions FDI is the Granger cause of industrial waste gas While industrial waste gas has no significant effect on foreign direct investment, and industrial waste gas is not the granger cause j A Causality Test of FDI and Environment Pollution in Liaoning Province Foreign direct investment mainly concentrates in the second industry in Liaoning province, especially in manufacturing industry Therefore, we use the industrial “three wastes” emissions to measure pollution Industrial wastewater emissions first decrease, then increase and finally decrease, so its data is not representative The solid waste emissions data violated greatly To simply, we selected industrial waste gas emissions as a representative of the degree of pollution This is due to the characteristics of the exhaust gas with difficult governance and large diffusion area after discharge is It is more representative index to represent pollution characteristics by other scholars In order to study the relationship with FDI and industrial waste gas emissions in Liaoning province, this essay first carried on causality test between them Before the Granger causality test method, the analysis of the relationship between economic phenomena are limited to qualitative analysis, which are difficult to reveal causal relationships between the various economic phenomena Therefore, Granger and Sims proposed the way to test causal j of foreign direct investment Among them, WG is the representative of industrial waste gas emissions (unit: hundred million cubic meters) FDI is the actual foreign direct investment (unit: hundred million US dollars) TABLE II the null hypothesis LNWG does not Granger Cause LNFDI LNFDI does not Granger Cause LNWG LNWG does not Granger Cause LNFDI LNFDI does not Granger Cause LNWG 18 GRANGER CAUSALITY TEST RESULTS lag period F statistics 1.05614 0.34373 Accept 7.55296 0.03337 Reject 5.54078 0.19833 Accept 15.4724 0.02627 Reject P value Decision B The Correlation Test between FDI and Environment Pollution in Liaoning Province As the time series data is easy to be auto-correlative, in order to eliminate autocorrelation phenomenon of error term, this essay took logarithm form of variables and use (3) to test whether there is correlativity between FDI and industrial waste gas industrial waste water/industrial added value 450 400 350 300 250 200 ln(WG ) D D ln( FDI ) P 150 ˄3˅ The test results of the relationship between FDI and Industrial waste gas are as follows: ln(WG ) 1.28 0.82 ln( FDI ) ˄4˅ From Tab 3, the relationship between foreign direct investments and industrial waste gas in Liaoning province was positive correlation, which means industrial exhaust gas increases as FDI, diminishes as FDI Every 1% increase of FDI in Liaoning province will go with 0.82% increase of industrial waste gas TABLE III 100 50 2000 Std Error t-Statistic Prob C -1.281913 3.995683 -0.320825 0.0756 LNFDI 0.821442 0.301352 2.725853 0.0260 R-squared 0.781539 Mean dependent var 9.600000 Adjusted R-squared 0.716731 S.D dependent var 0.699206 S.E of regression 0.133998 Akaike info criterion 1.760007 Sum squared resid 0.281230 Schwarz criterion 1.820524 Log likelihood -6.800033 F-statistic 7.430275 Durbin-Watson stat 1.874779 Prob(F-statistic) 0.002601 III 2002 2003 2004 2005 2006 2007 2008 2009 year B Structure Effect of FDI In terms of the structure of industry, foreign direct investment in Liaoning has been focused on investment of “production”, and about 60% of the introductions of foreign capital belong to industrial manufacturing No doubt that such a capital structure of Liaoning province shows a tendency of more damage to the environment capacity The increase in the FDI stock caused the structure of pollution aggravated pollution emissions This is related to the investment mode of “Out at Both Ends, Huge in and out” by which China has been taken China imports raw materials, (iron ore, oil, etc.) and exports finished products after processing (chemical, electronic products, chemical products, etc.) Most polluted production process are carried out in China Meanwhile, China only earn a little thinning processing fees which is a drop in the bucket compared with pollution control cost [11] But it can be seen from Tab.1 that since 2006 the industrial manufacturing share of FDI in Liaoning province investment have declined largely, and it greatly reduced the pollution emissions of the entire industrial, showing that FDI industry in Liaoning province is transformed to the clean industrial structure WASTE GAS Coefficient 2001 Figure Industrial pollution intensity changes in Liaoning province CORRELATION TEST RESULTS OF FDI AND INDUSTRIAL Variable industrial gas/industrial added value industrial solid waste/industrial added value ENVIRONMENTAL EFFECTS OF FOREIGN DIRECT INVESTMENT IN LIAONING PROVINCE Foreign direct investment not only promotes the global spread of capital and technology, but also contributes to the transfer of the environment pollution and resources pressure, whose impact on the environment is associated with the environmental characteristics of capital and technology C Enviromental Regulation Effect of FDI The government has increased the strength of environmental regulations in recent years, which prevent the pollution intensive foreign capital from entering, and reinforce control degree of the total pollutant amount Fig showed that indicators representing the degree of environmental pollution such as industrial waste water, industrial waste gas and industrial solid waste turned out the stable even declining tendency However, looser environment regulation is after all the cause of the entry of the foreign capital especially foreign capital with pollution intensive As China has different degree of regional environmental regulation, this caused the interregional transfer of industrial pollution in China to a certain extent From 1999 to 2006, China's industrial added values migrated to the east by 3% Instead, the industrial pollution obviously concentrated in the Midwest In addition to industrial waste water, main pollutants have migrated from the east to the center and west [12] A Technology Spillover Effect of FDI Technology spillover effect is refers to the impact on the environment of FDI's technology diffusion Taking the ratio of industrial emissions in industrial added value as characteristics of industrial pollution intensity, Fig shows the change of industrial pollution intensity in Liaoning province from 2000 to 2009 It can be seen that, as the characterization of industrial pollution intensity, each index has fallen significantly To some extent, this shows that the development of technology and the application of environmentally friendly technology have greatly decreased the intensity of industrial pollution emissions from all industries The overall decline in pollution emission intensity reduces the industry pollution emission levels Thus, it’s an effective way to reduce pollution emissions to improve the technical level of FDI in Liaoning province 19 FDI industrial waste water industrial waste gas Therefore, first, the government should create a standard transparent policies and legal environment, strengthen the supervision mechanism, and build a unified and open market environment with fair competition for foreign investment enterprises What’s more, as to the introduction of foreign direct investment projects that are resource saved and environment friendly, local governments should give the certain preferential policies, such as tax credits, etc Secondly, the government should adopt tilted industrial policies to encourage foreign direct investment to transfer from the second industry to tertiary industry, especially to the third industry, service and financial, and change the deformity industrial structure Last but not the least, China should play the role of government functional departments, further improve environmental standards and environmental policies, and establish appreciable and assessable environment index system industrial solid waste 2000000 1600000 1200000 800000 400000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year Figure Industrial “three wastes” emissions in Liaoning province D Scale Effect of FDI The actual use scale of FDI in Liaoning province increased from $ 248 million in 1990 to $15.444 billion in 2009 with the average annual growth rate as high as 22.95% Many scholar's research shows that China is still in the left of environmental Kuznets curve, and the expansion of the scale of FDI will only add to environmental pollution Its positive environmental effect has not yet appeared China's current polluted degree of GDP per capita is more serious than the same period abroad Severe environment pollution during the period of GDP per capita between 400 and 1000 dollars in China reached that during the period of per capita GDP between 4000 and 10000 in the developed countries [13] It means the pollution from each unit of GDP is far greater than of the same national income in other countries IV REFERENCES [1] [2] [3] [4] CONCLUSIONS AND POLICY RECOMMENDATIONS [5] Taking Liaoning province as an example, this paper discussed the relationship between foreign direct investment and the environment, and analyzed the environmental effects of foreign direct investment We got the following conclusions as follows: Foreign direct investment of Liaoning province increased from $ 248 million in 1990 to $15.444 billion in 2009 with the average annual growth rate as high as 22.95% Actual foreign direct investment mainly concentrated in the second industry, especially in manufacturing industry with the proportion of about 50% on average Taking the industrial waste gas emissions as the characteristic of environmental pollution degree, Granger causality tests showed that foreign direct investment in Liaoning province had significant effects on industrial waste gas emissions FDI is the Granger cause of industrial waste gas Every 1% increase of FDI goes with 0.82% increase of industrial waste gas emissions Environmental effects of foreign direct investment in Liaoning province include the technology spillover effect, structure effect, regulation effect and scale effect Economic expansion and economic structure of heavy pollution aggravated pollution emissions induced by the increase of the stock of FDI in Liaoning province Different degrees of regional environmental regulation in China caused the interregional transfer of industrial pollution to a certain extent [6] 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Causality Test of FDI and Environment Pollution in Liaoning Province Foreign direct investment mainly concentrates in the second industry in Liaoning province, especially in manufacturing industry... gas in Liaoning province was positive correlation, which means industrial exhaust gas increases as FDI, diminishes as FDI Every 1% increase of FDI in Liaoning province will go with 0.82% increase... Structure Effect of FDI In terms of the structure of industry, foreign direct investment in Liaoning has been focused on investment of “production”, and about 60% of the introductions of foreign capital