The recognition and application of FDI motivation

The motivation of Foreign Direct Investment (FDI) determines its spillover channel in host countries. If FDI is concentrating on local markets in host countries, the technology spillover it brings about is horizontal. If FDI is export-oriented, the spillover is vertical. As to host countries, vertical FDI is more popular than horizontal FDI because the former could bring more effects to local enterprises. Recent studies have shown that FDI transfers pollution industries to host countries to evade home countries´ strict environmental policies. Then it expands import from host countries which substitutes polluting production in home countries. This causes the phenomenon of “pollution space transfer” in China. This article proposes an index to distinguish FDI´s motivation and applies it in China´s industry. The result demonstrates that most of our country´s export-orientation FDI is released into intense carbon emission industries¹. This phenomenon testifies the hypothesis of China as “contamination shelter”. Accordingly China should introduce export-oriented clean industry positively and enhance environmental regulation standard to attract superior FDI.