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Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?

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Author Info
Beata Javorcik (The World Bank)
Shang-Jin Wei (IMF)

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Abstract

The "pollution haven" hypothesis refers to the possibility that multinational firms, particularly those engaged in highly polluting activities, relocate to countries with weaker environmental standards. Despite the plausibility and popularity of this hypothesis, the existing literature has found only limited evidence to support it. To enhance our ability to detect the possible "dirty secret," this study makes improvements in four areas. First, we focus on investment flows from multiple countries to 25 economies in Eastern Europe and the former Soviet Union. Transition countries are a suitable region for studying this question, as they offer a large variation in terms of environmental standards. Second, we take into explicit account the effect of host country corruption. Third, we include information on both the polluting-intensity of the potential investor and the environmental stringency in the potential host country, which allows us to test whether dirty industries are relatively more attracted to locations with weak standards. And fourth, we rely on firm-level rather than industry-level data. Despite these improvements, we find no support for the "pollution haven" hypothesis. If anything, firms in less polluting industries are more likely to invest in the region. We find no systematic evidence that FDI from "dirtier" industries is more likely to go to countries with weak environmental regulations.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Economic Analysis & Policy.

Volume (Year): 3 (2005)
Issue (Month): 2 ()
Pages: 1244-1244
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Handle: RePEc:bep:eapcon:v:3:y:2005:i:2:p:1244-1244

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Related research
Keywords: Pollution corruption foreign direct investment

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Find related papers by JEL classification:
F18 - International Economics - - Trade - - - Trade and Environment

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Arik Levinson & M. Scott Taylor, 2004. "Unmasking the Pollution Haven Effect," NBER Working Papers 10629, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February. [Downloadable!] (restricted)
    Other versions:
  3. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Daniel Kaufmann & Shang-Jin Wei, 1999. "Does "Grease Money" Speed Up the Wheels of Commerce?," NBER Working Papers 7093, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 5-29, October. [Downloadable!] (restricted)
  6. Damania, Richard & Fredriksson, Per G. & List, John A., 2003. "Trade liberalization, corruption, and environmental policy formation: theory and evidence," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 490-512, November. [Downloadable!] (restricted)
  7. Smarzynska, Beata K. & Shang-Jin Wei, 2000. "Corruption and the composition of foreign direct investment - firm-level evidence," Policy Research Working Paper Series 2360, The World Bank. [Downloadable!]
  8. Fredriksson, Per G. & List, John A. & Millimet, Daniel L., 2003. "Bureaucratic corruption, environmental policy and inbound US FDI: theory and evidence," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1407-1430, August. [Downloadable!] (restricted)
  9. Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Smarzynska Javorcik, Beata, 1999. "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights in Transition Economies," CEPR Discussion Papers 2228, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Letchumanan, Raman & Kodama, Fumio, 2000. "Reconciling the conflict between the 'pollution-haven' hypothesis and an emerging trajectory of international technology transfer," Research Policy, Elsevier, vol. 29(1), pages 59-79, January. [Downloadable!] (restricted)
  12. Dean, Judith M., 1992. "Trade and the environment : a survey of the literature," Policy Research Working Paper Series 966, The World Bank. [Downloadable!]
  13. Charles Kolstad & Yuqing Xing, 1998. "Do Lax Environmental Regulations Attract Foreign Investment?," University of California at Santa Barbara, Economics Working Paper Series wp28-98pt1, Department of Economics, UC Santa Barbara. [Downloadable!]
  14. Matthias Busse, 2004. "Transnational Corporations and Repression of Political Rights and Civil Liberties: An Empirical Analysis," Kyklos, Blackwell Publishing, vol. 57(1), pages 45-65, 02. [Downloadable!] (restricted)
  15. Wolfgang Keller & Arik Levinson, 2002. "Pollution Abatement Costs and Foreign Direct Investment Inflows to U.S. States," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 691-703, 07. [Downloadable!] (restricted)
  16. Yuquing Xing & Charles Kolstad, 2002. "Do Lax Environmental Regulations Attract Foreign Investment?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 1-22, January. [Downloadable!] (restricted)
  17. John F. Helliwell, 1994. "Empirical Linkages Between Democracy and Economic Growth," NBER Working Papers 4066, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Eskeland, Gunnar S. & Harrison, Ann E., 1997. "Moving to greener pastures : multinationals and the pollution-haven hypothesis," Policy Research Working Paper Series 1744, The World Bank. [Downloadable!]
    Other versions:
  19. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2000-2), pages 303-354. [Downloadable!]
  20. Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steven Globerman & Daniel Shapiro, 2004. "Governance Infrastructure and U.S. Foreign Direct Investment," International Finance 0404008, EconWPA. [Downloadable!]
    Other versions:
  2. Dean, Judith M. & Lovely, Mary E. & Wang, Hua, 2005. "Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China," Policy Research Working Paper Series 3505, The World Bank. [Downloadable!]
  3. Facundo Albornoz & Matthew A Cole & Robert J R Elliott & Marco G Ercolani, 2008. "In Search of Environmental Spillovers," Discussion Papers 08-03, Department of Economics, University of Birmingham. [Downloadable!]
  4. Annegrete Bruvoll and Taran Fæhn, 2004. "Transboundary environmental policy effects: Markets and emission leakages," Discussion Papers 384, Research Department of Statistics Norway. [Downloadable!]
  5. Ronald B. Davies & Helen T. Naughton, 2003. "Cooperation in Environmental Policy: A Spatial Approach," University of Oregon Economics Department Working Papers 2006-18, University of Oregon Economics Department, revised 10 Jun 2003. [Downloadable!]
  6. Smarzynska, Beata & Spartareanu, Mariana, 2004. "Do foreign investors care about labor market regulations?," Policy Research Working Paper Series 3275, The World Bank. [Downloadable!]
    Other versions:
  7. Alireza Naghavi, 2008. "Trade Sanctions and Green Trade Liberalization," Center for Economic Research (RECent) 011, University of Modena and Reggio E., Dept. of Economics. [Downloadable!]
  8. Robert Hoffmann & Lee Chew Ging & Bala Ramasamy & Matthew Yeung, 2004. "FDI and Pollution: A Granger Causality Test using Panel Data," CEABuR Working Papers 2, Centre for Europe-Asia Business Research. [Downloadable!]
  9. Jeffrey A. Frankel, 2003. "The Environment and Globalization," NBER Working Papers 10090, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Erik Dietzenbacher & Kakali Mukhopadhyay, 2007. "An Empirical Examination of the Pollution Haven Hypothesis for India: Towards a Green Leontief Paradox?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 36(4), pages 427-449, April. [Downloadable!] (restricted)
  11. Matthew A Cole & Robert R J Elliott & Eric Strobl, 2007. "The Environmental Performance of Firms: The Role of Foreign Ownership, Training, and Experience," Discussion Papers 07-08, Department of Economics, University of Birmingham. [Downloadable!]
    Other versions:
  12. Herman Vollebergh, 2004. "Lessons from the Polder: Is Dutch CO2-Taxation Optimal?," Working Papers 2004.6, Fondazione Eni Enrico Mattei. [Downloadable!]
  13. Jeffrey A. Frankel & Andrew K. Rose, 2002. "Is Trade Good or Bad for the Environment? Sorting Out the Causality," NBER Working Papers 9201, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Xiaodong Wu, 2004. "Pollution Havens and the Regulation of Multinationals with Asymmetric Information," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 3(2), pages 1265-1265. [Downloadable!] (restricted)
  15. Medalla, Erlinda & Lazaro, Dorothea C., 2005. "Does Trade Lead to a Race to the Bottom in Environmental Standards? Another Look at the Issues," Discussion Papers DP 2005-23, Philippine Institute for Development Studies. [Downloadable!]
  16. Alireza Naghavi, 2005. "Multilateral Environmental Agreements and Trade Obligations: A Theoretical Analysis of the Doha Proposal," Working Papers 2005.52, Fondazione Eni Enrico Mattei. [Downloadable!]
  17. Dieter Hesse, 2007. "Environmental Policy and Competitiveness in a Globalizing World: Challenges for Low-Income Countries in the UNECE Region," ECE Discussion Papers Series 2007_6, UNECE. [Downloadable!]
  18. M. Taylor, 2005. "Unbundling the Pollution Haven Hypothesis," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 4(2), pages 1408-1408. [Downloadable!] (restricted)
  19. Andreas Waldkirch & Munisamy Gopinath, 2004. "Pollution Haven or Hythe? New Evidence from Mexico," International Trade 0412005, EconWPA. [Downloadable!]
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