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Pollution havens and foreign direct investment : dirty secret or popular myth?

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  • Smarzynska, Beata K.

Abstract

The"pollution haven"hypothesis refers to the possibility that multinational firms, particularly those engaged in highly polluting activities, relocate to countries with weaker environmental standards. Despite the plausibility and popularity of this hypothesis, there is little evidence to support it. The authors identify four obstacles that may have impeded researchers'ability to find evidence in favor of the"pollution haven"hypothesis: 1) The possibility that some features of host countries, such as bureaucratic corruption, may deter inward foreign direct investment and also be positively correlated with lax environmental standards. Omitting this information in statistical analyses may produce misleading results. 2) The possibility that country- or industry-level data, typically used in the literature, may have masked the effect at the firm level. 3) Difficulties associated with measuring environmental standards of the host countries. 4) Difficulties associated with the measuring the pollution intensity of the multinational firms. The authors attempt to surmount these obstacles by explicitly taking into account corruption in host countries and using a firm-level data set on investment projects in 24 transition economies. With these improvements, the authors find some support for the"pollution haven"hypothesis, but evidence is still weak and does not survive numerous robustness checks.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2673.

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Date of creation: 30 Sep 2001
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Handle: RePEc:wbk:wbrwps:2673

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Keywords: Sanitation and Sewerage; Environmental Economics&Policies; Water and Industry; Pollution Management&Control; Decentralization; Environmental Economics&Policies; Water and Industry; TF030632-DANISH CTF - FY05 (DAC PART COUNTRIES GNP PER CAPITA BELOW USD 2; 500/AL; Sanitation and Sewerage; Pollution Management&Control;

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  1. Kaufman, Daniel & Shang-Jin Wei, 1999. "Does"grease money"speed up the wheels of commerce?," Policy Research Working Paper Series 2254, The World Bank.
  2. Smarzynska Javorcik, Beata, 1999. "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights in Transition Economies," CEPR Discussion Papers 2228, C.E.P.R. Discussion Papers.
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  7. Eskeland, Gunnar S. & Harrison, Ann E., 2003. "Moving to greener pastures? Multinationals and the pollution haven hypothesis," Journal of Development Economics, Elsevier, vol. 70(1), pages 1-23, February.
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  12. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  13. Smarzynska, Beata K. & Shang-Jin Wei, 2000. "Corruption and the composition of foreign direct investment - firm-level evidence," Policy Research Working Paper Series 2360, The World Bank.
  14. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
  15. Damania, Richard & Fredriksson, Per G. & List, John A., 2003. "Trade liberalization, corruption, and environmental policy formation: theory and evidence," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 490-512, November.
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