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Assessing the Pollution Haven Hypothesis in an Interdependent World

Author

Listed:
  • David Drukker

    (StataCorp)

  • Daniel Millimet

    (SMU)

Abstract

After proposing a simple theoretical framework to illustrate the importance of third-country effects in empirical studies of the Pollution Haven Hypothesis, we test the model using state-level panel data on inbound US FDI and relative abatement costs. Our analysis reveals that while own state attributes rarely have statistically significant effects on own inbound FDI when aggregated over all manufacturing sectors, many neighboring state attributes do matter. Moreover, the theoretical model does well in explaining FDI in the chemical sector; we tend to find significant effects in the correct direction of variables designed to reflect market demand and production costs. Finally, we consistently find a negative impact of own environmental stringency on inbound FDI in the chemical sector; the impact of neighboring environmental stringency is also statistically significant, but the impact is negative on average, contrary to our initial expectations. Nonetheless, the fact that the impact of more stringent environmental regulations spillover across states indicates that future research into the validity of the PHH must account for spatial spillovers.

Suggested Citation

  • David Drukker & Daniel Millimet, 2007. "Assessing the Pollution Haven Hypothesis in an Interdependent World," Departmental Working Papers 0703, Southern Methodist University, Department of Economics.
  • Handle: RePEc:smu:ecowpa:703
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    File URL: https://ftp1.economics.smu.edu/WorkingPapers/2007/Millimet/spfdi.pdf
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    Citations

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    Cited by:

    1. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2008. "Estimating regional trade agreement effects on FDI in an interdependent world," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 194-208, July.
    2. Esiyok, Bulent & Ugur, Mehmet, 2011. "Foreign direct investment in provinces: A spatial regression approach to FDI in Vietnam," Greenwich Papers in Political Economy 7893, University of Greenwich, Greenwich Political Economy Research Centre.
    3. Vinish Kathuria, 2018. "Does Environmental Governance Matter for Foreign Direct Investment? Testing the Pollution Haven Hypothesis for Indian States," Asian Development Review, MIT Press, vol. 35(1), pages 81-107, March.
    4. Ronald Davies & Helen Naughton, 2014. "Cooperation in environmental policy: a spatial approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(5), pages 923-954, October.
    5. José-Antonio Monteiro & Madina Kukenova, 2008. "Does Lax Environmental Regulation Attract FDI When Accounting For "Third-Country" Effects?," IRENE Working Papers 08-01, IRENE Institute of Economic Research.
    6. Neelakanta N.T. & Haripriya Gundimeda & Vinish Kathuria, 2013. "Does Environmental Quality Influence FDI Inflows? A Panel Data Analysis for Indian States," Review of Market Integration, India Development Foundation, vol. 5(3), pages 303-328, December.

    More about this item

    Keywords

    Foreign Direct Investment; Environmental Regulation; Spillovers; Spatial Econometrics;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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