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FDI, Energy Intensity and Growth: Evidence from Chinese Cities

FDI, Energy Intensity and Growth: Evidence from Chinese Cities. Robert J.R. Elliott (University of Birmingham, UK) Puyang Sun (Nankai University, China) Siyang Chen (National University of Singapore, Singapore ). Motivation.

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FDI, Energy Intensity and Growth: Evidence from Chinese Cities

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  1. FDI, Energy Intensity and Growth:Evidence from Chinese Cities Robert J.R. Elliott (University of Birmingham, UK) Puyang Sun (Nankai University, China) Siyang Chen (National University of Singapore, Singapore)

  2. Motivation • China now has become the largest recipient of foreign investment in the developing world with inflows of $95.25 billion in 2010 (World Development Indicators 2010) • China currently accounts for 17.7% of global energy consumption to produce approximately 8% of global output • In 2008 China’s emissions of sulphur dioxide (SO2) and carbon dioxide (CO2) were the highest and second highest in the world at 23.32 million and 2.7 billion tons respectively • In this paper we investigate the relationship between economic development, FDI and the efficiency of energy consumption in China

  3. Measurement of Energy Efficiency • Energy Intensity (ENTI) is a measure of the energy efficiency of an economy, which is calculated as units of energy per unit of GDP • Industrial Energy Intensity (ENDD) • Energy intensity is negatively correlated with energy efficiency

  4. Improving the energy efficiency of Chinese firms is essential to the sustainable developmentof the country. • Energy efficiency is not only important from a pollution perspective but also from the perspective of being able to use less oil, gas and coal in production (and hence less imports) and hence cheaper products. • One possible channel to enhance energy efficiency is energy-saving technology transfer from developed to developing countries • FDI is considered a critical channel for technology transfer (Keller 2004)

  5. Top 10 and Bottom 10 Cities of Energy Efficiency in China, 2005-2008 • Nearly all the cities with highest level of energy efficiency are in eastern coastal provinces • The majority of cities at the bottom belong to the central or western areas

  6. Figure 1 The Geographic Distribution of Agglomeration and FDI (2003-2008) Cities with the highest FDI inflow in actual use Cities with the highest agglomeration in finance sector

  7. Contribution • We employ an extensive city-level data set that covers 206 of China’s largest cities for the period 2005-2008 to investigate more closely the relationship between economic growth, FDI and the efficiency of energy consumption in China • We believe that a city-level study is a better able to represent regional differences compared with the more usual province level studies • We examine the relationship between the output of domestically-owned, foreign-owned and by Hong Kong, Taiwan and Macao (HTM) owned firms to better understand the relationship between FDI and local energy intensity

  8. Mechanism Total energy consumption can be decomposed into three channels: (Hübler and Keller, 2009) • Scale effect is left out when energy intensity is used (Keller, 2009) One of indirect effects from FDI to energy savings in our estimation • The main dimension in our study

  9. Technique effects of FDI on Energy Savings

  10. Core question: • Does FDI envourage energy saving (i.e. reduce energy intensity) in China through the technique effect? Sub-questions: • How do technique effects of FDI differ across Chinese cities? • If the effect of FDI differs by region, what are the mechanisms that drive these differences ?

  11. Regional facts of Energy Intensity • Lighter dots: Cities with lower energy intensity (i.e., higher energy efficiency)

  12. Regional distribution of FDI • Darker dots: Cities with higher FDI inflows

  13. Regional facts of income • Darker dots: Cities with higher income level

  14. These maps suggest: • Cities with the highest income are also those that receive the greatest volume of FDI, and • Cities with the highest income have higher energy efficiency (lower value of energy Intensity) • We now identify if these relationships hold econometrically and whether these relationships are consistent across Chinese cities and which if not which mechanisms drive any regional differences

  15. Estimation equation& Empirical results

  16. Data(From 2005 to 2008, across 206 Chinese municipal-cities )

  17. Results (National Level)

  18. YPC & EI (national regression) Column 2, 4 : • Inverted-U relationship between income per capita and energy intensityis confirmed at the national level • Turning point of the inverted-U curve is estimated at between RMB 1,651 and RMB 2,697 for ENTI, and RMB 1,840 and RMB 2,259 for ENDD • The majority of Chinese cities belong to the downward slopingpart of the inverted-U curve, which means the rising income per capita contributes to energy savings in these cities • A significant income-induced technique effect is expected to be found in the cities with higher income levels

  19. Indirect technique effects: income-induced effect • We propose that there is an inverted-U-shaped relationship between income per capita and energy intensity. The nonlinear relationship is expected to exist atthe national level • At the regional level, we pay more attention to the linear relationship between income and energy intensity, which reflects the income-induced technique effect • The income-induced effect intensifies with the income level and is expected to be prominent in the region with higher income

  20. FDI & EI(national regression) Column 3, 4 • inflows of FDI facilitate energy savings in China • A 1% of FDI inflows will generate a 0.02%-0.027% reduction in aggregate energy intensity • A 1% of FDI inflows will generate a around 0.03% reduction in industrial energy intensity

  21. Industrial Production(GIPd, GIPf,GIPh) & EI (national regression) Columns 5, 6 Production of domestic firms can lead to a reduction of energy efficiency in China Production of firms from HTM is helpful to enhance energy efficiency in China It is further confirmed that foreign firms help to enhance energy efficiency in China

  22. Results (Regional Level)

  23. Results (Regional Level)

  24. YPC & EI (regional results) EAST (Group A) • A significant negative linear relationship is confirmed • The income-induced technique effect is significant in the East China: in this area energy efficiency will ascend in accordance with income per capita CENTER (Group B) • For both ENTI and ENDD, an inverted-U relationship between YPC and EI is confirmed with negative and positive • For ENTI, there is a significantly positive linear relationship between income and energy intensity in this region, while for ENDD, this relationship becomes negative • The income-induced technique effect is ONLY significant for aggregate energy intensity in Central China. WEST (Group C) • For ENTI, NOsignificant relationship between income and energy intensity is found ( linear or nonlinear) • For ENDD, a negative linear relationship exists • Similarly, the income-induced technique effect is also ONLY significant for aggregate energy intensity in Central China

  25. FDI & EI (regional results) • A direct technique effect from FDI is insignificant for the east and exhibits a magnified in the central and western regions in terms of both significance and absolute value • The value of is slightly larger in the central rather than the western areas of China • The elasticity of ENTI on foreign investment is higher than that estimated for ENDD • In western cities, there is highly possible to exist a relatively higher technical difference between firm with FDI and domestic firms, compared with lower difference gap in eastern cities. This provide a reasonable reason to explain why the technical effects in western cities are more significant than in eastern cities.

  26. Direct Technique Effect of FDI - regional analysis • Demonstration effect: We denote demonstration effects in East, Center and West China by D1, D2 respectively so that:

  27. Direct Technique Effect of FDI - regional analysis • Vertical linkage effect We denote the vertical linkage effect in the east, center and west of China by V1, V2 respectively so that we have:

  28. Conclusions National Level: • inverted-U shape curve between per-capita income and energy intensity is confirmed at national level • majority of Chinese cities are on the downward sloping side of the inverted-U curve: significant income-induced technique effect • negative relationship between FDI inflows and energy intensity: energy-reducing technology transfer via FDI in China Regional Level: • inverted-U shape curve is not consistent across regions • In general, income-induced technique effect is more significant (in terms in statistical significance & estimated absolute values) in eastern areas, where the income level is relatively higher • energy-reducing technology effect via FDI is NOT significant in the east, but is confirmed for cities in the central and western areas

  29. Thank YouPuyang Sunpuyangsun@nankai.edu.cn

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