Porter and Pollution Haven Hypotheses

The R&D-based heterogeneous firms model, with a discriminatory environmental tax, is extended to a full endogenous growth model. Environmental tax evasion is applied to export firms. Trade liberalisation improves average productivity through the cleansing effect of entering the export market. However, it leads to a decrease in the economic growth rate due to an increase in fixed costs, pollution and bribes due to the composition effect. This implies the pollution haven hypothesis. An increase in the uniform environmental tax lowers the economic growth rate and has a non-monotonic effect on average productivity and total pollution emissions. An increase in the unilateral environmental tax on export firms encourages low-productivity export firms to exit the market, leading to economic growth and pollution reduction, implying a weak Porter hypothesis. When the total bribe increases, it implies the sanding-the-wheels-of-trade hypothesis. Although environmental tax evasion improves firms’ productivity, it decreases economic growth and increases pollution emissions, impeding sustainable development through the pollution haven hypothesis. The improvement in the quality of the political system due to a decrease in the fine rate increases the tax rate, which decreases economic growth and increases pollution. Therefore, the improvement in the quality of the political system impedes sustainable development.