Structural bias of foreign direct investment and urban pollution emissions: exacerbating effects of competitive investment incentives

Abstract As an integral component of China's rapid economic growth, the environmental externalities of foreign investment warrant rigorous assessment. Using Panel data from Chinese prefecture-level cities from 2002 to 2022, this study examined the impact of foreign direct investment (FDI) on urban pollution through the lens of its sectoral composition. Our results indicated that a higher proportion of FDI in the secondary sector significantly intensified urban pollution. This effect was particularly pronounced in western regions, cities with weaker environmental regulations and non-tourism-oriented cities. Mechanism analysis revealed that in the competition for FDI, local governments often lower environmental standards, which amplified the negative externalities of this sectoral bias and reinforced the "pollution haven" effect. Furthermore, a threshold regression analysis demonstrated that as inter-jurisdictional competition intensified, the adverse environmental impacts of secondary-sector FDI escalated in a stepwise manner. This study offers a structuralist explanation for the "pollution paradox" and provides actionable policy insights. Specifically, we advocate for a structural transformation of FDI, reformed performance evaluations for governments, and adapted environmental regulatory frameworks. These measures can help break the "race to the bottom" dynamic and achieve a balance between FDI quality and sustainable development.