FDI, financial market development and nonlinearities of energy and environmental efficiency in China: Evidence from both parametric and nonparametric models

This paper analyzes the impact of foreign direct investment (FDI) on energy and environmental efficiency considering all the inputs and outputs in the production process. To avoid model misspecifications, both parametric and nonparametric techniques are employed to investigate the heterogeneous impacts of FDI across cities with different financial market development levels. In the absence of endogeneity problems, we find that the impact of FDI on energy and environmental efficiency is closely related to the financial market development, which can determine the local absorption capacity of FDI. The impact can be positive only when the degree of financial market development surpasses a critical value. Our findings thus highlight the necessity to increase the local absorption capacity of FDI if policymakers wish to use FDI as a tool to increase energy and environmental efficiency in cities.