Environmental Regulation, Foreign Direct Investment and China's High-Quality Economic Development

8 As China's economy shifts from a rapid development stage to a high-quality 9 development stage, it is important to know how different FDI characteristics affect 10 high-quality economic development. Furthermore, under the constraints of 11 environmental regulations, will these impacts change? The dual-fixed spatial Durbin 12 model and panel data of 30 provinces in inland China from 2005 to 2018 were used for 13 analysis. This study finds that (1) under the constraints of environmental regulations, 14 the scale of FDI, export orientation, and technology spillover capacity have a significant 15 positive impact on China's high-quality economic development, but without the 16 constraints of environmental regulations, only the technological spillover capability of 17 FDI has such a significant positive impact. (2) FDI with strong technology spillover 18 capabilities not only promotes local development but also plays a significant role in 19 promoting high-quality economic development in surrounding areas through spillover 20 effects. (3) Compared with secondary industry, tertiary industry plays a stronger role in 21 promoting the high-quality development of China's economy. (4) The areas with high 22 quality economic development are concentrated in the eastern coastal cities. The 23 outdated economic and scientific research and technology in the central and western 24 regions means that they lack the ability to learn advanced technologies from FDI.


1.Introduction 29
Since the 1980s, China's economy has experienced momentous change; China has 30 rapidly improved the comprehensive strength of its economy and become an important 31 part of the world economy (Yuan et al., 2017). As shown in Figure 1, in 2020, China's 32 annual GDP exceeded the 100 trillion yuan mark, reaching 101.59 trillion yuan; its 33 economy grew 2.3% compared to 2019; and per capita GDP reached 72,447 yuan. 34 China's overall economic strength is stronger, and its position as the world's second 35 largest economy will also become more stable (Xie et al., 2020). However, to spur the 36 rapid development of its economy, China initially adopted the "extensive" type of 37 development, and this has led to serious damage to China's ecological environment (Li 38 et al., 2021). But economic development should also consider environmental protection 39 . The development of China's economy is now advancing from rapid 40 development to high-quality development: while developing in "quantity", China needs 41 to now focus on "quality" to move toward high-quality economic development (Wang, 42 2018) . open the door increasingly wider to serve all countries worldwide. This includes 50 providing a broader space for enterprises to develop in China.

51
FDI drove China's early economic development and brought in advanced 52 technology and capital, which greatly promoted China's early economic development 53 (Zafar et al., 2020) . Whether FDI also causes damage to the environment of foreign-54 invested countries has been a subject of controversy in academic circles, and two 55 opposing hypotheses have formed: the "pollution paradise" or the "pollution halo" (Feng 56 et al., 2019a; Li et al., 2017). The pollution paradise hypothesis argues that strict 57 environmental regulations in the home country encourage some companies to establish 58 themselves in developing countries with looser regulations to seek greater benefits. 59 Therefore, although foreign businessmen bring capital to developing countries and 60 promote their economic growth, they also cause environmental pollution ( through technology spillover effects, ameliorates the issues caused by poor production 64 technology in developing countries, and mitigates the environmental pollution caused 65 by production (Zhang and Zhou, 2016) . Therefore, it is still undetermined whether FDI 66 can promote China's development at its current stage, and this question remains worth 67 exploring. However, at present, low-quality FDI will not significantly promote China's 68 development (Li et al.). and to achieve the high-quality transformation of its economy, 69 China should introduce high-quality FDI (Hu and Xu, 2020). 70 In China's economic development, the use of FDI has shifted from managing scale 71 to an emphasis on managing both quantity and quality (Tian et al., 2019). At present, 72 there is less research on the quality of FDI. Moreover, the state is now advocating 73 economic transformation. At present, China is facing severe pressure to reduce 74 environmental pollution and carbon emissions. The government has gradually 75 increased the attention given to ecological and environmental issues and continuously 76 improved the intensity of its environmental regulation, which may also change the 77 magnitude and direction of FDI toward high economic quality. The empirical analysis 78 provided here can help China take better advantage of foreign capital and introduce 79 high-quality foreign capital to boost its economic transition. 80

2.Literature review 81
Protecting the ecological environment and developing the economy are not 82 necessarily opposed, but their relationship is both tense and strong. To achieve 83 sustainable economic development, China began to transform its economy to focus on 84 high-quality development. There is currently no uniform standard for measuring high-85 quality development. Zhou et al.(2020) and Jahanger(2021) used total factor 86 productivity to represent high-quality economic development, while (  time variables were added in this paper, which increased the accuracy of the obtained 185 information entropy. The specific calculation steps are as follows:

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(1) Select index: Set r years, n provinces and cities, m indicators, is the value 187 of index J for province I in year θ. 188 year, the high-quality economic development chart shown in Figure 2 was drawn using 207 MATLAB 2020a. 208

Selection and measurement of FDI quality 215
The quality of FDI is the most important explanatory variable in this study. This 216 article draws on the ideas and construction methods of Lei et al. (2021)and (Hu and Xu, 217 2020) and considers the availability of data for the four aspects of FDI: export 218 orientation, actual scale, technology spillover capacity, and pollution level. The 219 descriptions of the data are as follows: 220 Export orientation of FDI (export): FDI with a strong export orientation holds a 221 position in the international market through its internal advantages and can introduce 222 advanced technology to the host country during the investment process. This gives the 223 host country the opportunity to enter new export areas, thereby promoting the high-224 quality development of China's economy. This article uses the proportion of foreign-225 invested industrial enterprises' total exports to the total exports from all regional 226 operations to measure the export orientation of FDI. 227 The actual scale of FDI (pscale): The actual scale of FDI represents the economic 228 strength of foreign companies. Foreign companies with high economic power will bring 229 more technology and capital to the host country. They will have sufficient funds for 230 technological upgrades and environmental protection; it is easier to take positive 231 measures when subject to strict environmental regulations(Lei et al., 2021)；However, 232 the larger the actual scale of FDI is, the more likely that it will lead to the distortion of 233 internal information and bureaucratic management. When the scale of enterprises 234 increases, the benefits from economies of scale decline, and if there are no strict 235 environmental regulations, companies will often ignore environmental protection; thus, 236 large scale FDI is not conducive to the high-quality development of China's 237 economy (Hu and Xu, 2020). This research uses the average investment amount of 238 foreign-invested enterprises (total investment by foreign-invested enterprises/number 239 of foreign-invested enterprises) to represent scale. 240 Technology spillover capability of FDI (technology-sp): When foreign companies 241 invest, in addition to other resources, they bring technology resources to the host 242 country and allow the host country to learn advanced technology. In this study, the ratio 243 of the actual use of foreign capital to total fixed investment in the region is selected to 244 represent technology spillover capacity.  regulations is reflected not only in the abovementioned aspects but also in others, and 261 the study by Xiaowen Wang and others is not reasonable because it only captures 262 pollutant emissions. The proportion of industrial pollution source treatment investment 263 to regional GDP is used here to express environmental regulations. 264

Selection and measurement of control variables 265
Domestic investment in fixed assets (investment): this article takes it as one of the 266 control variables studied and characterizes it with (regional total investment-foreign 267 investment)/regional GDP. that the upgrading of industrial structure is advantageous for economic growth. 270 Therefore, industrial structure is taken as an important control variable in this study and 271 is defined by the GDP from secondary industry and that from tertiary industry/regional promote economic growth. Therefore, this article regards government fiscal 281 expenditure as a control variable, expressed as local government fiscal 282 expenditure/regional GDP. 283 Population growth rate (population). Does population growth promote or inhibit 284 economic growth? This question has always been a concern of economists and 285 demographers. Furuoka(2013) found that economic growth is driven by population, and 286 rapid population growth can stimulate economic development; Liu and Yuan(2020) 287 found that the effect of negative population growth on economic growth in the short 288 term is not obvious and that the economy can still grow; however, in the long term, 289 negative population growth is not conducive to economic growth. Therefore, the 290 population growth rate is regarded as a control variable. 291

Data Sources 292
In view of the availability of data, this article uses the data of 30 provinces in China 293 from 2005 to 2018 (excluding the data of Tibet, Taiwan and Hong Kong), and the data 294 related to currency have been converted to the base period. The original data come from 295 the "China Statistical Yearbook", "China Environmental Statistics Yearbook" and 296 "China Science and Technology Statistical Yearbook". 297

Spatial autocorrelation test 299
The study selects the global Moran's index and the local Moran's scatter plot to 300 test the spatial autocorrelation. The global Moran's index formula is as follows: 301 is the total number of space units; and represent 303 the attribute values of the i-th spatial unit and the j-th spatial unit, respectively;y is the 304 mean value of all spatial unit attribute values, is the value of the spatial weight 305 matrix. 306 Table 4

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The global Moran's index only shows whether there is spatial agglomeration, but 316 the specific place and type cannot be displayed. Therefore, the local Moran's index is 317 used to further analyze the specific locations where spatial agglomeration occurs. The

357
where 0 represents the constant term, 1,2 represent the coefficients of the 358 independent variable; 3,4 represent the spatial lag coefficient of the independent 359 variable; represents the spatial autoregressive coefficient; represents the time 360 fixed effect; represents the space fixed effect. 361

Spatial weight matrix 362
This article studies high-quality economic development. Therefore, this research 363 utilizes the economic distance weight matrix for the regression analysis. 364 where and are the GDP per capita of i or j ,respectively, and| − | 367 represents the economic gap between the two provinces. The smaller this value is, the 368 more similar the economic level of the two provinces is, the closer the economic 369 distance is, and the greater the spatial weight of the two provinces.   effects of the SDM to analyze the spillover effects between regions (see Table 5). 402  (population) is significantly positive at the 1% level, while the indirect effect is not 429 significant, indicating that China has reasonably controlled its population structure 430 through family planning policies and that population growth at this stage can provide 431 the needed talent for high-quality economic development. The direct effects of the 432 industrial structure for secondary (structure2) and tertiary industry (structure3) are both 433 significantly positive at the 1% level, but the coefficient of tertiary industry is larger 434 than that of secondary industry, indicating that China's industrial structure is relatively 435 reasonable at this stage and can promote local high-quality economic development, but 436 that tertiary industry plays a greater role in this. Therefore, China can focus on the 437 development of tertiary industry while ensuring a reasonable industrial structure. 438  The eastern coastal cities include 11 provinces: Beijing, Tianjin, Hebei, Liaoning, 453 Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, and Hainan. The 454 corresponding regression results are shown in Table 6 and Table 7. 455 indicating that the economically more developed eastern coastal cities are able to seize 464 the potential of FDI. Advanced technology and the opportunity to enter the international 465 market will promote the high-quality economic development of the region. However, 466 the direct effect of fiscal expenditure (expend) is significantly negative. This is because 467 China, unlike other developed countries, needs to consider not only modern economic 468 construction but also more comprehensive goals. This has led to problems in China's FDI's export orientation (export) and technology spillover capacity (tech-sp) is 478 significantly negative, indicating that for the economically less advanced central and 479 western inland regions, the entry requirements for FDI could be reduced to develop the 480 economy. However, because the economy and technology in these regions are outdated, 481 they cannot absorb the advanced technology brought by FDI and seize the opportunity 482 to enter the international market, and thus the environmental damage caused is greater 483 than the economic benefits. The direct effect of fiscal expenditure (expend) is 484 significantly positive, indicating that for the economically developing central and 485 western inland regions, fiscal expenditures by the state bring funds for infrastructure 486 construction and thus promote regional development and high-quality economic 487 development. The direct effects of the secondary (structure2) and tertiary industrial 488 structures (structure3) are significantly positive. This is because the economic 489 development of the eastern coastal areas is better, and its industrial structure has entered 490 the stage of rationalization, which has a certain promotion effect on economic 491 development. However, due their the high economic level, the promotion effect in the 492 eastern coastal areas is not significant. For the central and western inland areas, the 493 economic benefits brought by secondary and tertiary industry are relatively large, 494 although there are certain areas with a more developed industrial structure. Aside from 495 such disparities, the promotion effect on the economy is still more significant. 496 497 inflow is bound to be constrained by China's environmental regulations and policies. 506 Therefore, this article adds the interaction item of FDI quality and environmental 507 regulation to the above research to study whether the impact of different aspects of FDI 508 on high-quality economic development under the influence of environmental regulation 509 will change. 510 Table 8 511 Regression results of spatial Durbin model with environmental regulation added 512 Variable High-quality economic development restrictions on foreign-funded enterprises to supervise and guide the promotion of high-524 quality economic development. For further analysis, spatial effect decomposition is also 525 carried out on the SDM (see Table 9). 526 Models (5) to (8) in Table 9 are the results of the spatial effect decomposition of 527 the spatial Durbin model in Table 8. The direct effect of the actual scale of FDI is 528 significantly positive at the 5% level, indicating that although a series of issues such as 529 environmental protection may be ignored when the actual scale of FDI is large, 530 environmental regulations will constrain these companies. While pursuing their 531 interests, they must also take into account environmental protection and technological 532 upgrading, but such policies have not played a significant role in promoting neighboring 533 areas. The reason is that current environmental regulatory policies are based on the 534 development of the focal region and there is economic competition between regions, so 535 the formulation of environmental regulations and policies does not take into account 536 the high-quality economic development of other regions. The direct effect of FDI's 537 export orientation is significantly positive at the 5% level, indicating that under the 538 constraints of environmental regulations and policies, export-oriented FDI can bring 539 more advanced technologies and opportunities for China to enter the international 540 market. The direct effect of FDI's technology spillover capacity is still significantly 541 positive at the 1% level, but the indirect effect has become insignificant, indicating that 542 there is currently competition between regions. Competition leads to the 543 implementation of environmental regulatory policies in various regions to promote 544 local high-quality economic development, but these do not care about the high-quality 545 economic development of neighboring areas. The direct development of the pollution 546 level of FDI is not significant, but the indirect effect is significantly negative at the 5% 547 level, indicating that the implementation of environmental regulatory policies in a 548 region will pressure foreign-funded enterprises to transfer pollution to neighboring 549 regions, which is not conducive to high-quality economic development in neighboring 550 areas. 551

4.3.Robustness test 556
In the above, the proportion of industrial pollution source treatment investment 557 and regional GDP are used to represent environmental regulations. This article 558 considers that the formulation of environmental regulation policies allows enterprises 559 to carry out technological innovations and stops their polluting behaviors. When the 560 government implements strict regulatory policies, companies will see an increased cost 561 of technological innovation or equipment renewal to meet pollutant emission standards. 562 Therefore, the proportion of industrial pollution control investment across the number 563 of companies can be used to represent environmental regulations. The results are 564 consistent with the direction and significance of the variables in the original regression, 565 so the test results are robust. 566 Through the empirical research, this paper finds that (1) under the constraints of 589 environmental regulations, the actual scale, export orientation, and technology spillover 590 capacity of FDI have a significant positive impact on the high-quality development of 591 China's economy. Without the constraints of environmental regulations, only the 592 technological spillover capability of FDI has a significant positive impact on high-593 quality economic development. This shows that environmental regulatory policies can 594 not only restrict FDI but also guide foreign-funded enterprises to significantly promote 595 China's high-quality economic development.
(2) FDI with strong technology spillover 596 capabilities not only promotes local development but also plays a significant role in 597 promoting high-quality economic development in surrounding areas through spillover 598 effects.
(3) Compared with secondary industry, tertiary industry plays a stronger role in 599 promoting the high-quality development of China's economy, indicating that China 600 needs to promote the "rationalization" of its industrial structure toward "advanced" 601 industries and promote informatization and high-tech industry development. (4) The 602 areas with high economic development quality concentrate on the eastern coastal cities. 603 The development of the central and western regions is far behind that in these areas. 604 Examining the subregions, it can be seen that due to the outdated economic and 605 scientific research technology in the central and western regions, they have insufficient 606 ability to learn the advanced technology brought by FDI. (5) Under the influence of the 607 environmental regulations and policies implemented in this region, foreign-funded 608 enterprises will be under pressure to transfer pollution to neighboring regions, which is 609 not conducive to their high-quality economic development. 610 Based on the results of the empirical analysis, corresponding policy 611 recommendations are now proposed for China's economic development: 612 First, environmental regulatory policies should be further optimized and improved. 613 China's high-quality economic development must not only achieve steady economic 614 growth but also incorporate the improvement of high-tech levels and the protection of 615 the environment. The government can implement certain preferential policies to 616 encourage local enterprises and foreign-invested enterprises to engage in technological 617 innovation, increase the enforcement of environmental regulations, impose severe 618 penalties on enterprises that damage the environment, further supervise and guide 619 enterprises' "green development", and promote China's high-quality economic 620 development.

621
Second, China should focus its use of foreign capital on obtaining financial 622 assistance to access advanced foreign technology and promoting the technological 623 upgrading of Chinese enterprises. To achieve high-quality economic development, 624 China must adjust the source structure of FDI, avoid the transfer of highly polluting, 625 highly energy-consuming outdated industries from developed countries to China, and 626 follow the content of the "Foreign Investment Law of the People's Republic of China" 627 implemented in 2020. The entry of FDI must be strictly screened and reasonably guided 628 to introduce high-quality FDI. 629 Third, China must actively coordinate competition between regions. To achieve 630 rapid economic growth and strong performance indicators, regional governments will 631 engage in a "race to the bottom" that prioritizes economic development but causes 632 damage to resources and the environment. Therefore, the central government should 633 actively guide local governments and formulate reasonable performance indicators, 634 appropriately reduce economic indicators, add the environment and education to 635 performance evaluation indicators, and develop a coordination mechanism for regional 636 interests to effectively organize and promote "competition for the best" among regions. 637 Fourth, China's industrial structure should be further upgraded and optimized. 638 Optimizing and upgrading the industrial structure can not only promote economic 639 growth but also affect whether China can overcome the "middle income trap" and better 640 respond to international competition. In the past ten years, China has made reasonable 641 adjustments and upgrades to its industrial structure, and its economic quality has been 642 continuously improved, but problems still exist with its industrial structure. China has 643 further upgraded and optimized its industrial structure while ensuring the development 644 of basic industries. China should strengthen the development of high-tech industries, 645 accelerate the development of modern industries, and promote the coordinated 646