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Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

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  • Ulrich Wagner

    ()

  • Christopher Timmins

Abstract

Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into "pollution havens"? We test this hypothesis using panel data on outward foreign direct investment (FDI) flows of various industries in the German manufacturing sector and account for several econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that externalities associated with FDI agglomeration can bias estimates away from finding a pollution haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for agglomeration and employ a GMM estimator to control for endogenous, time-varying determinants of FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to break the possible correlation between environmental regulatory stringency and unobservable attributes of FDI recipients in the cross-section. When accounting for these issues we find robust evidence of a pollution haven effect for the chemical industry.

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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 43 (2009)
Issue (Month): 2 (June)
Pages: 231-256

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Handle: RePEc:kap:enreec:v:43:y:2009:i:2:p:231-256

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: Agglomeration effects; Congestion effects; Environmental regulation; Foreign direct investment; German manufacturing; Panel data; Pollution havens; F18; F23; Q52;

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References

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  1. Arik Levinson & M. Scott Taylor, 2004. "Unmasking the Pollution Haven Effect," NBER Working Papers 10629, National Bureau of Economic Research, Inc.
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