Westward Movement of Water Polluting Firms in China : Pollution Reduction Mandates and Location Choice

Polluting firms' relocation results in the efficiency loss of the environmental policy. This paper provides a systematic study of the water pollution relocation driven by the 11th Five-Year Plan pollution reduction mandates in China. We explore a unique dataset of the environmental statistics, which contains 12932 water-polluting firms from 9 major Chemical Oxygen Demand (COD) emitting industries newly established between 2006-2010. Our estimation of the conditional logit model provides strong evidence of the water pollution relocation from the coastal provinces with strict environmental regulations to the west provinces with less strict regulations and demonstrates the distinct relocation patterns of heterogeneous polluting firms. While foreign polluting firms were generally sensitive to the mandates, domestic polluting firms were more resistant. Only heavily polluting firms were driven to the west provinces. We thus argue that there is an efficiency loss of the environmental policy and recommend integrated water management as well as close coordination of the local governments for more efficient environmental regulation in China