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Testing the Pollution Haven Effect: Does the Type of FDI Matter?

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  • Jitao Tang

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Abstract

Many studies have tested the pollution haven effect (PHE) which predicts that the tightening of local environmental regulations would shift foreign direct investment (FDI) to less regulated jurisdictions. However, most of them ignored the heterogeneity of FDI. This paper studies the PHE on local-market-oriented and export-oriented FDI and tests whether the two types have different responsiveness to environmental regulations in a host country. A simple model is developed to describe how different types of multinational companies respond in distinct ways to stricter environmental policies in host countries. Using US outward FDI data for 50 host countries and a survey measure of both the stringency and the enforcement of local environmental regulations, I find a significant deterrent effect of local environmental regulations on inward FDI. Furthermore, FDI in a host country is not only affected by local environmental regulations but also by environmental regulations in proximate countries. More importantly, accounting for the relative stringency of environmental regulations between a host country and the United States is critical for identifying a PHE. I find a significantly stronger effect of environmental policies on both types of FDI in host countries with environmental regulations that are stricter than those in the United States. In these countries, export-oriented FDI also exhibits a greater sensitivity to local environmental regulations than local market-oriented FDI. Copyright Springer Science+Business Media Dordrecht 2015

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  • Jitao Tang, 2015. "Testing the Pollution Haven Effect: Does the Type of FDI Matter?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(4), pages 549-578, April.
  • Handle: RePEc:kap:enreec:v:60:y:2015:i:4:p:549-578 DOI: 10.1007/s10640-014-9779-7
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Natalia Zugravu-Soilita, 2017. "Trade in Environmental Goods: Empirical Exploration of Direct and Indirect Effects on Pollution by Country’s Trade Status," Working Papers 2017.56, Fondazione Eni Enrico Mattei.
    2. Thi Anh Dam & Markus Pasche & Niclas Werlich, 2017. "Trade Patterns and the Ecological Footprint - a theory-based Empirical Approach," Jena Economic Research Papers 2017-005, Friedrich-Schiller-University Jena.
    3. Maoliang Bu & Marcus Wagner, 2016. "Racing to the bottom and racing to the top: The crucial role of firm characteristics in foreign direct investment choices," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 47(9), pages 1032-1057, December.
    4. Natalia Zugravu-Soilita, 2017. "How does Foreign Direct Investment Affect Pollution? Toward a Better Understanding of the Direct and Conditional Effects," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(2), pages 293-338, February.

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