A small-spatial scale analysis on how the green foreign direct investment contributes to carbon mitigation in China

As the global transition toward carbon neutrality accelerates, green foreign direct investment (green FDI) has become an increasingly important channel through which developing economies may pursue growth while reducing emissions. Yet evidence on whether green FDI contributes to host-country carbon mitigation remains limited. This paper investigates whether, and through which mechanisms, green FDI reduces the carbon-emission intensity of domestic firms in China. To capture localized spillover effects, we construct a novel micro-spatial dataset that delineates circular buffer zones around energy-intensive enterprises and links the presence of nearby green foreign-invested firms to firm-level carbon intensity. The results indicate that a greater concentration of green FDI firms within a 3.5-kilometer radius significantly lowers the carbon intensity of domestic enterprises. Mechanism analyses indicate that the effect is driven by demonstration and learning, increased market competition, and forward-backward production linkages. Our findings highlight the role of spatially concentrated green FDI in supporting low-carbon structural transformation in developing economies.