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Do Lax Environmental Regulations Attract Foreign Investment?

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Author Info
Charles Kolstad (University of California, Santa Barbara)
Yuqing Xing (Graduate School of International Relations, International University of Japan)

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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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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number wp28-98pt1.

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Date of creation: 01 May 1998
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Handle: RePEc:cdl:ucsbec:wp28-98pt1

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

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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. Carlo Carraro & Domenico Siniscalco, 1992. "Environmental innovation policy and international competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(2), pages 183-200, March. [Downloadable!] (restricted)
    Other versions:
  2. Markusen James R. & Morey Edward R. & Olewiler Nancy D., 1993. "Environmental Policy when Market Structure and Plant Locations Are Endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 69-86, January. [Downloadable!] (restricted)
    Other versions:
  3. Jamuna Agarwal, 1980. "Determinants of foreign direct investment: A survey," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(4), pages 739-773, December. [Downloadable!] (restricted)
  4. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August. [Downloadable!] (restricted)
  5. Robert S. Pindyck, 1979. "The Structure of World Energy Demand," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661772.
  6. Shafik, Nemat & Bandyopadhyay, Sushenjit, 1992. "Economic growth and environmental quality : time series and cross-country evidence," Policy Research Working Paper Series 904, The World Bank. [Downloadable!]
  7. Zellner, Arnold, 1970. "Estimation of Regression Relationships Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 441-54, October. [Downloadable!] (restricted)
  8. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May. [Downloadable!] (restricted)
  9. Tobey, James A, 1990. "The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Test," Kyklos, Blackwell Publishing, vol. 43(2), pages 191-209.
  10. James R. Hines, Jr., 1996. "Tax Policy and the Activities of Multinational Corporations," NBER Working Papers 5589, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Grossman, Gene M & Krueger, Alan B, 1995. "Economic Growth and the Environment," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 353-77, May. [Downloadable!] (restricted)
    Other versions:
  12. van Beers, Cees & van den Bergh, Jeroen C J M, 1997. "An Empirical Multi-country Analysis of the Impact of Environmental Regulations on Foreign Trade Flows," Kyklos, Blackwell Publishing, vol. 50(1), pages 29-46.
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(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. Smarzynska Javorcik, Beata & Wei, Shang-Jin, 2001. "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?," CEPR Discussion Papers 2966, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Wolfgang Keller & Arik Levinson, 1999. "Environmental Compliance Costs and Foreign Direct Investment Inflows to U.S. States," NBER Working Papers 7369, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Beghin, John C., 2000. "Environment and Trade in Developing Economies: A Primer for the World Bank's 'Global Economic Prospects 2001'," Staff General Research Papers 1872, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  4. Henry Egteren & R. Smith & Andrew Eckert, 2006. "Environmental liability and harmonization in the presence of transboundary effects and hidden assets," European Journal of Law and Economics, Springer, vol. 22(2), pages 143-163, September. [Downloadable!] (restricted)
  5. Ulrich Wagner & Christopher Timmins, 2009. "Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(2), pages 231-256, June. [Downloadable!] (restricted)
  6. Jaafar , Abdul Hamid & Al-Amin, Abul Quasem & Siwar, Chamhuri, 2008. "A CGE Analysis of the Economic Impact of Output-Specific Carbon Tax on the Malaysian Economy," MPRA Paper 10210, University Library of Munich, Germany. [Downloadable!]
  7. repec:bep:eapcon:v:3:y:2005:i:2:p:1244-1244 is not listed on IDEAS
  8. Al-Amin, Abul Quasem & Jaafar, Abdul Hamid & Siwar, Chamhuri, 2008. "A Computable General Equilibrium Approach To Trade And Environmental Modelling In The Malaysian Economy," MPRA Paper 8772, University Library of Munich, Germany. [Downloadable!]
  9. Hua Wang & Yanhong Jin, 2002. "Industrial ownership and environmental performance : evidence from China," Policy Research Working Paper Series 2936, The World Bank. [Downloadable!]
    Other versions:
  10. Hong Hwang & Chao-Cheng Mai, 2004. "The Effects of Pollution Taxes on Urban Areas with an Endogenous Plant Location," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(1), pages 57-65, September. [Downloadable!] (restricted)
  11. Elif Akbostanci & G.Ipek Tunç & Serap Türüt-Asik, 2004. "Pollution Haven Hypothesis and the Role of Dirty Industries in Turkey’s Exports," ERC Working Papers 0403, ERC - Economic Research Center, Middle East Technical University, revised Feb 2004. [Downloadable!]
  12. Jenkins, Rhys, 1998. "Environmental Regulation and International Competitiveness: A Review of Literature and Some European Evidence," Discussion Papers 01, United Nations University, Institute for New Technologies. [Downloadable!]
  13. Henry van Egteren & R. Smith & Dean McAfee, 2004. "Harmonization of Environmental Regulations When Firms are Judgment Proof," European Journal of Law and Economics, Springer, vol. 17(2), pages 139-164, March. [Downloadable!] (restricted)
  14. Andreas Waldkirch & Munisamy Gopinath, 2008. "Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 289-313, November. [Downloadable!] (restricted)
  15. Vries, Frans P. de & Withagen, Cees, 2005. "Innovation and environmental stringency: the case of sulfur dioxide abatement," Discussion Paper 18, Tilburg University, Center for Economic Research. [Downloadable!]
  16. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu, 1998. "Capital markets responses to environmental performance in developing countries," Policy Research Working Paper Series 1909, The World Bank. [Downloadable!]
  17. Baek, Jungho & Koo, Won W., 2008. "A Dynamic Approach to the FDI-Environment Nexus: The Case of China and India," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6508, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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