Introduction:

Foreign Direct Investment (FDI) is one of the key factors of China's economic success. It is one of the most important driving forces of the country's economic growth, industry transformation and technology upgrading. The inflow of foreign capital only amounted to ignorable 86 million US dollars in 1971, increasing to whopping 116 billion US dollars in 2011, making China the second largest FDI host country in the world only after the U.S. with an inflow of 226.9 billion US dollars. The gross value of industrial output and the number of employees of Foreign Invested Enterprises (FIEs) account for 25.87% and 28.08% of China's total of Sized-and-above enterprises1, respectively. In the meantime, China's CO2 emission amounted to 8.979 billion tons in 2011, accounting for 26.4% of the world’s total CO2 emission; China has overtaken the U.S. as the world's largest CO2 emitter since 2006. Since China receives a great amount of cost-oriented FDI, it is widely believed that China, together with many other East Asian developing countries, has become a major destination of international environmental dumping. Therefore, whether FDI inflows intensify China's CO2 emission has become a hot topic in academic debates. Yet, just from the increase of FDI and the increase in CO2 emissions, one cannot conclude that the first causes the second. Parallel to FDI, also domestic investment (DI) has increased rapidly and equally or even more greatly contributed to China's capital formation and GDP growth. The question then is, which one has larger impact on China's CO2 emission and contributes more to China's environmental deterioration. In this chapter, we use provincial panel level data to estimate the impact of FDI and DI on China's CO2 emissions. The article is structured as follows: section 2 briefly reviews the previous relevant literature on this topic, section 3 presents the empirical model and describes the data sources, section 4 presents the empirical results and findings and the final section summarizes and concludes the chapter.