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Do Stringent Environmental Regulations Attract Foreign Direct Investment in Developing Countries? Evidence on the “Race to the Top” from Cross-Country Panel Data

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  • Yeseul Kim
  • Dong-Eun Rhee

Abstract

It is widely believed that environmental regulations in a developing country increase abatement costs for firms and, in turn, make the country a less attractive investment avenue for multinational firms from advanced economies. Using panel data of 120 developing countries from 2000 to 2014, this study empirically investigates whether stringent environmental regulations deter foreign direct investment (FDI) in developing countries. The empirical results are the exact opposite of the pollution haven effect, namely, stringent environmental regulations significantly attract FDI, a circumstance that causes a “race to the top.” The results are robust when tested against various specifications.

Suggested Citation

  • Yeseul Kim & Dong-Eun Rhee, 2019. "Do Stringent Environmental Regulations Attract Foreign Direct Investment in Developing Countries? Evidence on the “Race to the Top” from Cross-Country Panel Data," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(12), pages 2796-2808, September.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:12:p:2796-2808
    DOI: 10.1080/1540496X.2018.1531240
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    Cited by:

    1. Xiaolei Yang & Lingyun He & Sihua Tian & Yufei Xia & Deqing Wang, 2021. "Construction of China’s Green Institutional Environmental Index: Using Functional Data Analysis method," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 154(2), pages 559-582, April.
    2. Ma, Guangcheng & Qin, Jiahong & Zhang, Yumeng, 2023. "Does the carbon emissions trading system reduce carbon emissions by promoting two-way FDI in developing countries? Evidence from Chinese listed companies and cities," Energy Economics, Elsevier, vol. 120(C).
    3. Jacob Dalder & Gbemi Oluleye & Carla Cannone & Rudolf Yeganyan & Naomi Tan & Mark Howells, 2024. "Modelling Policy Pathways to Maximise Renewable Energy Growth and Investment in the Democratic Republic of the Congo Using OSeMOSYS (Open Source Energy Modelling System)," Energies, MDPI, vol. 17(2), pages 1-27, January.
    4. Filip Beule & Haiyan Zhang, 2022. "The impact of government policy on Chinese investment locations: An analysis of the Belt and Road policy announcement, host-country agreement, and sentiment," Journal of International Business Policy, Palgrave Macmillan, vol. 5(2), pages 194-217, June.
    5. Dai, Siwei & Du, Xiaoyan, 2023. "Discovering the role of trade diversification, natural resources, and environmental policy stringency on ecological sustainability in the BRICST region," Resources Policy, Elsevier, vol. 85(PB).
    6. Dongao Li & Songdong Shen, 2022. "Social Environment and Healthy Investment Behavior: Joint Influence of Culture and Institution on China," IJERPH, MDPI, vol. 19(1), pages 1-17, January.
    7. Assad Ullah & Xinshun Zhao & Muhammad Abdul Kamal & Jiajia Zheng, 2022. "Environmental regulations and inward FDI in China: Fresh evidence from the asymmetric autoregressive distributed lag approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1340-1356, January.

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