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Do Lax Environmental Regulations Attract Foreign Investment?

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  • Kolstad, Charles D.
  • Xing, Yuqing

Abstract

There has been considerable controversy over the empirical significance of the theoretically predicted pollution haven hypothesis. Generally, empirical papers have failed to find an effect on industrial location of weaker or stricter environmental regulations. In this paper we find strong confirmation of theoretical predictions. We present a statistical test of the impact of environmental regulations on the capital movement of polluting industries. The empirical study is conducted by examining foreign direct investment (FDI) of several US industries, representing industries with high pollution control costs (chemicals and primary metals) as well as industries with more modest pollution control costs (electrical and non-electrical machinery, transportation equipment, and food products). At issue is the effect of the laxity of environmental regulation on FDI. As laxity is not directly observed, we posit two equations, one for FDI determination and one for pollutant emissions, a variable positively correlated with the unobserved variable. We use aggregate national sulfur emissions as the pollutant. Using instruments for the unobserved variable, the statistical results show that the laxity of environmental regulations in a host country is a significant determinant of FDI from the US for heavily polluting industries and is insignificant for less polluting industries.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt3268z4rx.

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Date of creation: 01 May 1998
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Handle: RePEc:cdl:ucsbec:qt3268z4rx

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Keywords: Lax; Environmental; Regulations; Foreign; Investment?;

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References

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  1. Virginia D. McConnell & Robert M. Schwab, 1990. "The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry," Land Economics, University of Wisconsin Press, vol. 66(1), pages 67-81.
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  16. Jamuna Agarwal, 1980. "Determinants of foreign direct investment: A survey," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(4), pages 739-773, December.
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  18. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, October.
  19. Robert S. Pindyck, 1979. "The Structure of World Energy Demand," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661772, December.
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  23. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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