A Blessing or a Curse? Highway Connection and the Entry of Polluting Firms in China

Abstract

We investigate how highway connections influenced the entry of polluting firms based on panel data from 257 Chinese prefectures from 1998 to 2012. We also investigate the heterogeneity and influencing channels. We use the generalized difference-in-difference method as a tool in the empirical analysis. We have three main findings. First, highway connections increased the entry of polluting firms by 54.5 percent. Second, the heterogeneity analysis shows that this effect is mainly caused by prefectures on provincial borders, prefectures in central China, and prefectures with more than 1 million residents in urban districts. Third, highway connections reduced the concern about environmental protection by local governments of prefectures on provincial boundaries but increased concern about local governments of prefectures in interior regions. The concern about employment increased regardless of a prefecture’s location in a province. These results indicate that less developed regions, i.e., those on provincial boundaries, valued the benefit of job creation for welfare improvement more than the harm of pollution. Hence, they intentionally reduced environmental regulation to induce polluting firms’ entry. Our results provide new and insightful insights into the transition of economic development to a sustainable path, especially in developing countries.