Empirical Study of the Impact of Outward Foreign Direct Investment on Water Footprint Benefit in China

Abstract

How to enhance the water footprint benefit in conjunction with outward foreign direct investment (OFDI) is of great significance to reconcile the contradiction between supply and demand of water resources. This paper examines the effect of OFDI on the water footprint benefit using system GMM (Generalized Method of Moments) on a dynamic panel data. The results revealed that, in general, OFDI was not conducive to enhancing social, spatial, and environmental benefits of China’s water footprint, but was conducive for improving water footprint economic benefits. The results also showed that different types of OFDI exert differential effects on water footprint benefits. Specifically, the market-seeking and resource-seeking types of OFDI are not conducive for enhancing social and spatial benefits of China’s water footprint, but have improved (although not significantly) economic benefits of the water footprint. However, the market-seeking type of OFDI is conducive for improving environmental benefits of the water footprint, while the resource-seeking OFDI is not conducive for improving environmental benefits of the water footprint. In addition, the technology-seeking OFDI is conducive to the social, economic, spatial, and environmental benefits of China’s water footprint. Furthermore, the path-wise OFDI (investing in developing countries) is not conducive to enhancing social, spatial, and environmental benefits of China’s water footprint, but has improved (although not significantly) the economic benefits of China’s water footprint. On the other hand, the inverse OFDI (investing in developed countries) is conducive to China’s water footprint including its social, economic, spatial, and environmental benefits. The findings from this study have relevant policy implications and can help provide some policy prescriptions for an economy such as China to engage in OFDI and enhance water footprint benefits. For instance, in addition to expanding market-seeking and resource- seeking OFDI, China should actively increase the scale of technology-seeking OFDI. In addition, while continuing to expand path-wise OFDI, China should further increase the scale of inverse OFDI. By taking advantage of the complementary and synergetic effects of different types of OFDI, an economy can capture the whole effects of OFDI to reap the water footprint’s full social, economic, spatial, and environmental benefits.