This paper examines a causal relationship between foreign direct investment (FDI) and firms' pollution intensity by exploiting the policy of China's FDI access relaxation in 2002. The result shows that FDI leads to a significant reduction in firms' pollution intensity. The mechanism tests find that FDI reduces pollution intensity by increasing firms' productivity, pollution management abilities, and the output of lightly polluting firms. The effect primarily acts on firms in lightly polluting industries and firms in the eastern region. The findings support the pollution halo hypothesis and provide implications for developing countries like China by evaluating the effectiveness of policies to attract FDI.

This letter provides firm-level evidence that policy makers tailor trade policy to suit selected firms. It argues that firms with higher levels of specific assets find it more costly to reorganize production, and are hurt more by international competition. In response, policy makers grant more trade protection to firms with fixed assets. Since protectionism is costly, firms compete for it, which creates diffusion dynamics in which the protection granted to one firm affects the protection granted to others. This claim is tested utilizing the special role antidumping duties (ADDs) play in international trade, and combining petitions for ADDs with financial data on the firms filing them in a unique dataset. Using spatial autoregressive models, the authors find that firms with specific assets are granted more protection. However, diffusion dynamics differ within and between groups of firms producing the same good. This suggests that firms can partly shape their own level of trade protection.