Environmental courts and foreign direct investments: evidence from China

As China’s pollution problems worsen, environmental disputes are increasing rapidly. However, only 1% of environmental disputes can be resolved via judicial channels. Based on the establishment of environmental courts since 2007, we employ the multi-period DID approach to investigate the impact of environmental courts on foreign direct investments. We find that (1) compared with cities without environmental courts, FDI of cities with environmental courts would drop by 3.32% from the average, which is consistent with the pollution haven hypothesis. Besides, we verify the credibility of the conclusion through detailed endogeneity discussions, placebo tests, and robustness tests. (2) The negative effect of environmental courts on foreign direct investments is more salient in the east, regions with higher historical environmental investment, and regions with more serious local protectionism. (3) There are two channels. The greater risks of environmental litigation and stricter environmental public supervision brought by environmental courts would lead to additional environmental violation costs, thereby inhibiting foreign direct investments. Our findings provide new causal evidence for the pollution haven hypothesis from the perspective of intensive environmental justice.