Why it Pays to be Green

A study with a comprehensive sample of 185 Chinese cities of different sizes shows that air and water pollution reduction increase foreign direct investment (FDI) inflows.

Jul 01, 2019
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In recent years cities have had a major role in addressing major sustainability challenges such as cleaner air and water. More than half of the world’s population lives in urban areas, a share that is expected to grow rapidly in coming years. But whereas the broader environmental and societal benefits of cities’ efforts to lower air pollution levels and improve wastewater treatment are self-evident, the question remains whether it is also economically advantageous for them to do so. Air pollution has generally been linked to level of industrialization, suggesting that more polluted air may be the price that cities, especially those in emerging economies, have to pay in exchange for enhanced economic activity.

We studied cities’ sustainability in relation to foreign direct investment (FDI) inflows, to assess whether it does “pay” for cities to be green. Using a comprehensive sample of 185 Chinese cities of different sizes over a seven-year period, we investigated whether air and water pollution reductions pay off in terms of increasing FDI inflows. Both for air quality and wastewater treatment, the answer is “yes”. The size of the impact also points at substantial economic relevance. Our study suggests that international firms prefer to invest in greener cities because of their increasing commitment to employees’ wellbeing. Living in industrial areas has a negative effect on people’s (psychological) health; air quality is also explicitly mentioned in relation to low rankings for expat quality of life in various cities. Second, international firms can bolster their reputation and, especially for wastewater treatment, save costs and learn innovative approaches early.

The research has important policy implications for urban governance and more broadly for society at large. For achieving a future that is cleaner, healthier, and more prosperous, we should embrace the central role of cities. This applies not just to China, with its strong role in different levels of government, but also to other countries where cities have similar room for maneuver in the environmental realm. Given the severity and urgency of environmental issues, greater and more direct policy interventions at city level are increasingly called for, in market economies as well. It pays for us, private citizens, to live in clean and prosperous areas. Our research shows that it also pays for cities to be green.


By: Palgrave Macmillan/Journal of International Business Policy

Christina Tuballes

Associate Editor, Palgrave Macmillan

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