The mechanism of foreign direct investment on China's sulfur dioxide emissions: Evidence from partial least squares structural equation modeling.

Examining the impact of Foreign Direct Investment (FDI) on sulfur dioxide (SO2) emissions is essential for sustainable development, especially given that China became part of the East Asia acid rain zone. This paper presents a mechanism by which FDI affects China's SO2 emissions, incorporating a multi-path analysis and a causal inference. First, the multi-path analysis is developed by considering the effects of scale, technique, and composition as mediating variables. Second, the causal inference is established by integrating three methods: including the moderating variable of Environmental regulation intensity (ERI), disregarding the theory of reverse causality, and examining the persistence of multi-path effects. Finally, the mechanism is empirically tested using Partial Least Squares Structural Equation Modeling (PLS-SEM) from 2012 to 2018. The multi-path analysis indicates that FDI led to an increase in SO2 emissions with a partial mediating effect, thereby supporting the Pollution Haven Hypothesis. Specifically, FDI increased SO2 emissions directly and indirectly through the mediating effect of scale. Conversely, FDI decreased SO2 emissions indirectly through the mediating effect of composition and technique, with the latter exhibiting a stronger effect. The causality test indicates that FDI was the cause of SO2 emissions, supporting a unidirectional relationship between FDI and SO2 emissions. ERI demonstrated a negative moderating effect on the relationship between FDI and SO2 emissions. Specifically, FDI significantly increased SO2 emissions when ERI was low; conversely, the direct impact of FDI on SO2 emissions became statistically insignificant when ERI was high. This paper provides insights into understanding the multi-path effect of FDI on pollution in China, guiding FDI management and offering implications for policy formulation.