Does International Economic Integration Lead to a Cleaner Production in China?

Abstract

In contrast to the Pollution Haven Hypothesis, the Trade-Up Hypothesis holds that international integration helps improve firms’ environmental performance in developing countries. Using firm-level data from Shanghai, this paper examines how international linkages, in the form of foreign direct investment or international trade, affect firms’ environmental compliance and performance. We find that firms with international linkage via ownership exhibit better compliance with environmental regulation and emit less pollution than firms with no international linkage. We also find that firms with international linkage via market exposure are more likely to exhibit better compliance with environmental regulation than firms with no international linkage, but find no evidence that the former emit less pollution than the latter. This provides a piece of empirical evidence for the Trade-Up Hypothesis.

Keywords: Trade-Up Hypothesis, Pollution Haven Hypothesis, International Integration, Environment, China