Effects of FDI on the Efficiency of Government Expenditure on Environmental Protection Under Fiscal Decentralization: A Spatial Econometric Analysis for China

Abstract

Most governments strive for an ecological civilization so the efficiency of government expenditure on environmental protection (EPEE) is an important issue. While it is recognized that foreign direct investment (FDI) enhances environmental protection, this investigation focuses on the effects of FDI on the efficiency of government expenditure on environmental protection under fiscal decentralization. Analysis is conducted using an output-oriented data envelopment analysis (DEA) scale return model to calculate the efficiency of environmental protection spending in China. Then, a spatial model is built to test the linkages among FDI, fiscal decentralization and the efficiency of government expenditure. The results reveal that, firstly, the efficiency of government spending has been enhanced over the last 10 years. Secondly, FDI is positively correlated with the efficiency of government environmental expenditure in terms of both quantity and quality of spending and it has a positive spillover effect. Thirdly, financial decentralization is negatively correlated with the efficiency of environmental spending, but it improves the effect of FDI. Accordingly, policy proposals are that the government should improve the supervision system for environmental spending and local governments should pursue FDI, improve the structure of FDI and use its spillover effect to enhance the efficiency of environmental expenditure.