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Foreign Direct Investment and Pollution Havens: Evaluating the Evidence from China

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  • Dean, Judith M.
  • Lovely, Mary E.
  • Wang, Hua

Abstract

One of the most contentious debates today is whether pollution-intensive industries seek locations with weak environmental standards, turning these locations into 'pollution havens." Empirical studies to date show little evidence to support the pollution haven hypothesis, but suffer potentially from omitted variable bias, specification, and measurement errors. This paper estimates the strength of pollution-haven behavior by examining the location choices of equity joint venture (EJV) projects in China. We derive a location choice model from a theoretical framework that incorporates the firm's production and abatement decision, agglomeration and factor abundance. We estimate conditional logit and nested multinomial logit models using new data sets containing information on a sample of EJV projects, effective environmental levies on water pollution, and estimates of Chinese emissions and abatement costs for 3-digit ISIC industries. Results from 2886 manufacturing joint venture projects during 1993-1996 show EJVs from all source countries go into provinces with high concentrations of foreign investment, relatively abundant stocks of skilled workers, concentrations of foreign firms, and special incentives. Environmental stringency does affect location choice, but not in the manner described by the pollution haven hypothesis. Relatively weak environmental levies are a significant attraction for joint ventures with partners from Hong Kong, Macao, Taiwan, and other Southeast Asian developing countries. In contrast, joint ventures with partners from industrial country sources (e.g., US, UK and Japan) are actually attracted by stringent environmental levies, regardless of the pollution intensity of the industry. We discuss the likely role of technological differences in explaining these results.

Suggested Citation

  • Dean, Judith M. & Lovely, Mary E. & Wang, Hua, 2004. "Foreign Direct Investment and Pollution Havens: Evaluating the Evidence from China," Working Papers 15854, United States International Trade Commission, Office of Economics.
  • Handle: RePEc:ags:uitcoe:15854
    DOI: 10.22004/ag.econ.15854
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    References listed on IDEAS

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    Cited by:

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    2. Gary Koop & Lise Tole, 2008. "What is the environmental performance of firms overseas? An empirical investigation of the global gold mining industry," Journal of Productivity Analysis, Springer, vol. 30(2), pages 129-143, October.
    3. Davies, Ronald B. & Ellis, Christopher J., 2007. "Competition in taxes and performance requirements for foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1423-1442, August.
    4. Andreas Waldkirch & Munisamy Gopinath, 2004. "Pollution Haven or Hythe? New Evidence from Mexico," International Trade 0412005, University Library of Munich, Germany.
    5. Amiti, Mary & Smarzynska Javorcik, Beata, 2008. "Trade costs and location of foreign firms in China," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 129-149, February.
    6. Bin Dong & Benno Torgler, 2010. "The Consequences of Corruption: Evidence from China," Working Papers 2010.73, Fondazione Eni Enrico Mattei.
    7. Daniel Balsalobre‐Lorente & Oana M. Driha & George Halkos & Shekhar Mishra, 2022. "Influence of growth and urbanization on CO2 emissions: The moderating effect of foreign direct investment on energy use in BRICS," Sustainable Development, John Wiley & Sons, Ltd., vol. 30(1), pages 227-240, February.
    8. Judith M. Dean & Mary E. Lovely & Hua Wang, 2017. "Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China," World Scientific Book Chapters, in: Mary E Lovely (ed.), International Economic Integration and Domestic Performance, chapter 9, pages 155-167, World Scientific Publishing Co. Pte. Ltd..
    9. Barut, Abdulkadir & Kaya, Emine & Bekun, Festus Victor & Cengiz, Sevgi, 2023. "Environmental sustainability amidst financial inclusion in five fragile economies: Evidence from lens of environmental Kuznets curve," Energy, Elsevier, vol. 269(C).
    10. Dinda, Soumyananda, 2004. "Environmental Kuznets Curve Hypothesis: A Survey," Ecological Economics, Elsevier, vol. 49(4), pages 431-455, August.
    11. repec:rim:rimwps:26-07 is not listed on IDEAS
    12. Chakraborty, Debashis & Mukherjee, Sacchidananda, 2010. "Relationship between Trade, Investment and Environment: A Review of Issues," MPRA Paper 23333, University Library of Munich, Germany.
    13. International Monetary Fund, 2005. "Trade Costs and Location of Foreign Firms in China," IMF Working Papers 2005/055, International Monetary Fund.
    14. José M. Cansino & Rocio Román-Collado & Juan C. Molina, 2019. "Quality of Institutions, Technological Progress, and Pollution Havens in Latin America. An Analysis of the Environmental Kuznets Curve Hypothesis," Sustainability, MDPI, vol. 11(13), pages 1-20, July.
    15. Ning Chang, 2012. "The empirical relationship between openness and environmental pollution in China," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 55(6), pages 783-796, August.

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