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Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

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  • Ulrich J. 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

Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-05.

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Length: 43
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-05

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Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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Keywords: agglomeration effects; congestion effects; environmental regulation; foreign direct investment; German manufacturing; panel data; pollution havens;

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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.
  2. Copeland,B.R. & Scott Taylor,M., 2003. "Trade, growth and the environment," Working papers 10, Wisconsin Madison - Social Systems.
  3. Yuquing Xing & Charles Kolstad, 2002. "Do Lax Environmental Regulations Attract Foreign Investment?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 1-22, January.
  4. Edward Glaeser, 1997. "Learning in Cities," NBER Working Papers 6271, National Bureau of Economic Research, Inc.
  5. Head, Keith & Ries, John & Swenson, Deborah, 1995. "Agglomeration benefits and location choice: Evidence from Japanese manufacturing investments in the United States," Journal of International Economics, Elsevier, vol. 38(3-4), pages 223-247, May.
  6. Claudia M. Buch & Jörn Kleinert & Alexander Lipponer & Farid Toubal, 2005. "Determinants and effects of foreign direct investment: evidence from German firm-level data," Economic Policy, CEPR & CES & MSH, vol. 20(41), pages 52-110, 01.
  7. Goldstein, G. S. & Gronberg, T. J., 1984. "Economies of scope and economies of agglomeration," Journal of Urban Economics, Elsevier, vol. 16(1), pages 91-104, July.
  8. Head, Charles Keith & Mayer, Thierry, 2002. "Market Potential and the Location of Japanese Investment in the European Union," CEPR Discussion Papers 3455, C.E.P.R. Discussion Papers.
  9. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  10. Daniel Millimet & John List, 2004. "The Case of the Missing Pollution Haven Hypothesis," Journal of Regulatory Economics, Springer, vol. 26(3), pages 239-262, 08.
  11. Josh Ederington, Arik Levinson & Jenny Minier, 2003. "Footlose and Pollution Free," Working Papers gueconwpa~03-03-04, Georgetown University, Department of Economics.
  12. Matthew A. Cole & Robert J. R. Elliott & Per G. Fredriksson, 2006. "Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 157-178, 03.
  13. de Melo, Jaime & Grether, Jean-Marie, 2003. "Globalization and Dirty Industries: Do Pollution Havens Matter?," CEPR Discussion Papers 3932, C.E.P.R. Discussion Papers.
  14. Tim Jeppesen & John A. List & Henk Folmer, 2002. "Environmental Regulations and New Plant Location Decisions: Evidence from a Meta-Analysis," Journal of Regional Science, Wiley Blackwell, vol. 42(1), pages 19-49.
  15. Dao-Zhi Zeng & Laixun Zhao, 2006. "Pollution Havens and Industrial Agglomeration," Discussion Paper Series 197, Research Institute for Economics & Business Administration, Kobe University.
  16. Robert J. R. Elliott & Kenichi Shimamoto, 2008. "Are ASEAN Countries Havens for Japanese Pollution-Intensive Industry?," The World Economy, Wiley Blackwell, vol. 31(2), pages 236-254, 02.
  17. List, John A. & Co, Catherine Y., 2000. "The Effects of Environmental Regulations on Foreign Direct Investment," Journal of Environmental Economics and Management, Elsevier, vol. 40(1), pages 1-20, July.
  18. Christian A. L. Hilber & Ioan Voicu, 2006. "Agglomeration economies and the location of foreign direct investment: quasi-experimental evidence from Romania," LSE Research Online Documents on Economics 3574, London School of Economics and Political Science, LSE Library.
  19. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
  20. Wolfgang Keller & Arik Levinson, 2002. "Pollution Abatement Costs and Foreign Direct Investment Inflows to U.S. States," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 691-703, November.
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