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Environmental Regulation Induced Foreign Direct Investment

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  • Robert J R Elliott
  • Ying Zhou

Abstract

The last decade has witnessed a renewed interest in the relationship between environmental regulations and international capital flows. However, empirical studies have so far failed to find conclusive evidence for this so-called pollution haven or race to the bottom effect where foreign direct investment (FDI) is assumed to be attracted to low regulation countries, regions or states. In this paper we present a simple theoretical framework to demonstrate that greater stringency in environmental standards can lead to a strategic increase in capital inflows which we refer to as environmental regulation induced FDI. Our result reveals a possible explanation for the mixed results in the empirical literature and provides an illustration of the conditions under which environmental regulations in the host country can affect the location decision of foreign firms.

Suggested Citation

  • Robert J R Elliott & Ying Zhou, 2013. "Environmental Regulation Induced Foreign Direct Investment," Discussion Papers 13-08, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:13-08
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    References listed on IDEAS

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    Cited by:

    1. Francesca Sanna-Randaccio & Roberta Sestini & Ornella Tarola, 2014. "Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity," Working Papers 2014.55, Fondazione Eni Enrico Mattei.
    2. Antonietti,Roberto & Marzucchi,Alberto, 2013. "Green investment strategies and export performance: A firm-level investigation," INGENIO (CSIC-UPV) Working Paper Series 201302, INGENIO (CSIC-UPV).
    3. Birg, Laura & Voßwinkel, Jan S., 2018. "Emission taxes, firm relocation, and quality differences," Center for European, Governance and Economic Development Research Discussion Papers 347, University of Goettingen, Department of Economics.
    4. Greaney, Theresa M. & Li, Yao & Tu, Dongmei, 2017. "Pollution control and foreign firms’ exit behavior in China," Journal of Asian Economics, Elsevier, vol. 48(C), pages 148-159.
    5. repec:kap:enreec:v:67:y:2017:i:2:d:10.1007_s10640-015-9990-1 is not listed on IDEAS
    6. Matthew Cole & Robert Elliott & Toshihiro Okubo, 2014. "International environmental outsourcing," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(4), pages 639-664, November.
    7. Polk, Andreas & Schmutzler, Armin & Müller, Adrian, 2014. "Lobbying and the power of multinational firms," European Journal of Political Economy, Elsevier, vol. 36(C), pages 209-227.
    8. Bassem Kahouli & Anis Omri & Anissa Chaibi, 2014. "Environmental Regulations, Trade, and Foreign Direct Investment: Evidence from Gravity Equations," Working Papers 2014-189, Department of Research, Ipag Business School.
    9. Bialek, Sylwia & Weichenrieder, Alfons J., 2015. "Do stringent environmental policies deter FDI? M&A versus Greenfi eld," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113179, Verein für Socialpolitik / German Economic Association.
    10. Voßwinkel, Jan & Birg, Laura, 2017. "Emission Taxes, Relocation, and Quality Differences," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168298, Verein für Socialpolitik / German Economic Association.
    11. 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.
    12. repec:eee:riibaf:v:42:y:2017:i:c:p:353-364 is not listed on IDEAS

    More about this item

    Keywords

    FDI; environmental regulations; pollution halo;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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