Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis
AbstractDoes 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 InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 10-05.
Date of creation: 2010
Date of revision:
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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
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Web page: http://econ.duke.edu/
agglomeration effects; congestion effects; environmental regulation; foreign direct investment; German manufacturing; panel data; pollution havens;
Other versions of this item:
- 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.
- F18 - International Economics - - Trade - - - Trade and Environment
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
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