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Foreign Direct Investment and Environmental Policy: Have Location Factors Been Neglected?

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  • Francesca Sanna-Randaccio
  • Roberta Sestini

Abstract

This paper analyzes the effect of asymmetric environmental policies on firms' international location strategies in pollution-intensive sectors, when countries differ in terms of market size. The model shows that, when the tighter mitigation measures are introduced by the larger country and unit transport cost is high, the probability of firms not relocating abroad via foreign direct investment increases with market asymmetry. Furthermore, in some key scenarios, the total relocation outcome predicted by the pollution haven hypothesis is never an optimal strategy. The analysis suggests that international environmental rules should take account of differences in countries' market size and thus ability to attract production.

Suggested Citation

  • Francesca Sanna-Randaccio & Roberta Sestini, 2011. "Foreign Direct Investment and Environmental Policy: Have Location Factors Been Neglected?," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 18(1), pages 45-60.
    • Handle: RePEc:taf:raaexx:v:18:y:2011:i:1:p:45-60
    DOI: 10.1080/16081625.2011.9720873
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    1. Löschel, Andreas & Alexeeva-Talebi, Victoria & Mennel, Tim, 2008. "Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?," ZEW Discussion Papers 08-061, ZEW - Leibniz Centre for European Economic Research.
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    Cited by:

    1. Giulio Cainelli & Massimiliano Mazzanti & Sandro Montresor, 2012. "Environmental Innovations, Local Networks and Internationalization," Industry and Innovation, Taylor & Francis Journals, vol. 19(8), pages 697-734, November.
    2. Sanja Franc, 2015. "Foreign direct investment and sustainable development in the European Union," Notitia - journal for economic, business and social issues, Notitia Ltd., vol. 1(1), pages 117-133, December.
    3. -, 2015. "Foreign Direct Investment in Latin America and the Caribbean 2015," La Inversión Extranjera Directa en América Latina y el Caribe, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 38215 edited by Eclac, September.

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