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Do Lax Environmental Regulations Attract Foreign Investment?

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  • Kolstad, Charles D.
  • Xing, Yuqing

Abstract

There has been considerable controversy over the empirical significance of the theoretically predicted pollution haven hypothesis. Generally, empirical papers have failed to find an effect on industrial location of weaker or stricter environmental regulations. In this paper we find strong confirmation of theoretical predictions. We present a statistical test of the impact of environmental regulations on the capital movement of polluting industries. The empirical study is conducted by examining foreign direct investment (FDI) of several US industries, representing industries with high pollution control costs (chemicals and primary metals) as well as industries with more modest pollution control costs (electrical and non-electrical machinery, transportation equipment, and food products). At issue is the effect of the laxity of environmental regulation on FDI. As laxity is not directly observed, we posit two equations, one for FDI determination and one for pollutant emissions, a variable positively correlated with the unobserved variable. We use aggregate national sulfur emissions as the pollutant. Using instruments for the unobserved variable, the statistical results show that the laxity of environmental regulations in a host country is a significant determinant of FDI from the US for heavily polluting industries and is insignificant for less polluting industries.

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  • Kolstad, Charles D. & Xing, Yuqing, 1998. "Do Lax Environmental Regulations Attract Foreign Investment?," University of California at Santa Barbara, Economics Working Paper Series qt3268z4rx, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt3268z4rx
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    2. Özge Barış-Tüzemen & Samet Tüzemen, 2022. "The Impact of Foreign Direct Investment and Biomass Energy Consumption on Pollution in BRICS Countries: A Panel Data Analysis," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(1), pages 76-92, January.
    3. Bartzokas, Anthony & Yarime, Masaru, 1997. "Technology Trends in Pollution-Intensive Industries: A Review of Sectoral Trends," UNU-INTECH Discussion Paper Series 1997-06, United Nations University - INTECH.
    4. Caspar Sauter, 2014. "How should we measure environmental policy stringency? A new approach," IRENE Working Papers 14-01, IRENE Institute of Economic Research.
    5. Javorcik Beata Smarzynska & Wei Shang-Jin, 2003. "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(2), pages 1-34, December.
    6. Kakali Mukhopadhyay & Debesh Chakraborty, 2005. "Is liberalization of trade good for the environment? Evidence from India," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 12(1), pages 109-136, June.
    7. George Adu, 2013. "Effects on growth of environmental policy in a small open economy," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 15(4), pages 343-365, October.
    8. Mohamed Ali Hfaiedh & Wajdi Bardi, 2021. "Does FDI and Corruption affect Environmental Quality in Tunisia?," International Journal of Energy Economics and Policy, Econjournals, vol. 11(4), pages 267-275.
    9. Hakan Mihci & Selim Cagatay & Onur Koska, 2005. "The Impact Of Environmental Stringency On The Foreign Direct Investments Of The Oecd Countries," Journal of Environmental Assessment Policy and Management (JEAPM), World Scientific Publishing Co. Pte. Ltd., vol. 7(04), pages 679-704.
    10. Rashmi Rastogi & Aparna Sawhney, "undated". "What Attracts FDI in Indian Manufacturing Industries?," Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi Discussion Papers 13-02, Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi, India.
    11. Shi Wang & Wen Zhang & Hua Wang & Jue Wang & Mu-Jun Jiang, 2021. "How Does Income Inequality Influence Environmental Regulation in the Context of Corruption? A Panel Threshold Analysis Based on Chinese Provincial Data," IJERPH, MDPI, vol. 18(15), pages 1-18, July.
    12. Hassaballa, Hoda, 2014. "Testing for Granger causality between energy use and foreign direct investment Inflows in developing countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 31(C), pages 417-426.
    13. Dinda, Soumyananda, 2004. "Environmental Kuznets Curve Hypothesis: A Survey," Ecological Economics, Elsevier, vol. 49(4), pages 431-455, August.
    14. Cristian Sima & Gheorghe Marinescu, 2012. "Scarcity Natural Resources and the History of their Exploitation," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(Special 1), pages 259-266, May.
    15. Oikonomou, Vlasis & Patel, Martin & Worrell, Ernst, 2006. "Climate policy: Bucket or drainer?," Energy Policy, Elsevier, vol. 34(18), pages 3656-3668, December.
    16. Naz Onel & Avinandan Mukherjee, 2014. "The effects of national culture and human development on environmental health," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 16(1), pages 79-101, February.
    17. Kaderják, Péter, 1996. "A hazai közvetlen külföldi befektetéseket meghatározó tényezőkről egy kvantitatív elemzés [On the factors determining direct foreign investment in Hungary a quantitative analysis]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1072-1087.
    18. Nordström, Håkan & Vaughan, Scott, 1999. "Trade and the environment," WTO Special Studies, World Trade Organization (WTO), Economic Research and Statistics Division, volume 4, number 4.
    19. Li, Feiyang & Lin, Ziyue & Huang, Liangxiong & Yang, Caiting, 2022. "Environmental regulation and global value chain division position：Analysis based on global transnational data," Energy Policy, Elsevier, vol. 168(C).
    20. Wei-Bin Zhang, 2014. "Global Economic Growth and Environmental Change," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 64(3), pages 3-29, July-Sept.
    21. Zeng, Ka & Eastin, Joshua, 2012. "Do Developing Countries Invest Up? The Environmental Effects of Foreign Direct Investment from Less-Developed Countries," World Development, Elsevier, vol. 40(11), pages 2221-2233.
    22. Vinish Kathuria, 2018. "Does Environmental Governance Matter for Foreign Direct Investment? Testing the Pollution Haven Hypothesis for Indian States," Asian Development Review, MIT Press, vol. 35(1), pages 81-107, March.
    23. Dasgupta, Susmita & Meisner, Craig & Wheeler, David & Jin, Yanhong, 2002. "Agricultural Trade, Development and Toxic Risk," World Development, Elsevier, vol. 30(8), pages 1401-1412, August.
    24. Ilker Akar, 2019. "The Pollution Haven Hypothesis and Foreign Trade - A Survey on the Relation with Environment," Economics Literature, WERI-World Economic Research Institute, vol. 1(1), pages 37-50, June.
    25. Neelakanta N.T. & Haripriya Gundimeda & Vinish Kathuria, 2013. "Does Environmental Quality Influence FDI Inflows? A Panel Data Analysis for Indian States," Review of Market Integration, India Development Foundation, vol. 5(3), pages 303-328, December.

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