This paper employs a difference-in-difference-in-difference approach to examine the emission reduction and foreign direct investment nexus in China. It combines a firm-level dataset with emission reduction target statistics at city level. The findings indicate that stringent environmental regulation is associated with a fall of the output of foreign firms in general and the shrinking of pollution-intensive industries in cities with heavy emission reduction pressure in particular. It is also shown that the location choice of foreign investment changes as emission reduction targets at city level vary. Finally, it is found that environmental regulation helps improve the structure of foreign direct investment and hence contributes to industrial upgrading in the economy.

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