Effects of China’s Market-oriented Economic Reform, FDI Inflows on Electricity Intensity

Abstract China’s reform and open-up policy has been implemented since 1978 that have reshaped China from many aspects. On the road to economic transformation from planned economy to market-oriented economy, foreign direct investment (FDI) has been regarded as a kind of ‘power engine’ in China’s economic growth. Based on the provincial panel data from 2000 to 2017, this paper contributes to conduct the impact of China’s market-oriented economic reform, foreign direct investment (FDI) on electricity intensity. The progress of China’s market-oriented economic reform was measured by NERI index (degree of marketization) developed by National Economic Research Institute Reform Foundation. We then construct a new set of indicators of FDI to measure its quantity and characteristics, which are the degree of FDI participation in host country, technological level of FDI, import-oriented foreign-invested enterprises and share of FDI invested in manufacturing sector. Meanwhile, in order to examine the degree of marketization on electricity intensity, the whole sample was divided into coastal and inland groups based on their development stage. The findings concluded that marketization is an important determinant in decreasing China’s electricity intensity. FDI can be a source of innovation that promotes energy efficiency in manufacturing sector. The high degree of FDI participation in host country will hinder the improvement of energy efficiency. While in general, it has the potential to advance energy efficiency with the progress of China’s marketization. The high-quality of FDI symbolized by technological level is an important contributor in improving energy efficiency, and its effect in China’s inland area is significantly greater than that in the coastal area. Trade liberalization shows a reverse impact on electricity intensity in coastal area and inland area. The investment in environmental pollution control has no significant impact in decreasing electricity intensity. As expected, the expansion of secondary industry will increase energy consumption per unit of GDP.