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Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?

  • Javorcik, Beata
  • Wei, Shang-Jin

The ‘pollution haven’ hypothesis refers to the possibility that multinational firms, particularly those engaged in highly polluting activities, relocate to countries with weaker environmental standards. Despite the plausibility and popularity of this hypothesis, the existing literature has found little evidence to support it. This Paper identifies four areas of difficulties that may have impeded the researcher’s ability to uncover this ‘dirty secret.’ This includes the possibility that some features of FDI host countries, such as bureaucratic corruption, may deter inward FDI, but are positively correlated with laxity of environmental standards. Omitting this information in statistical analyses may give rise to misleading results. Another potential problem is that country- or industry-level data, typically used in the literature, may have masked the effect at the firm level. In addition, the environmental standards of the host countries and pollution intensities of the multinational firms are not easy to measure. This study addresses these problems present in the earlier literature by taking explicitly into account corruption levels in host countries and using a firm-level data set on investment projects in 24 transition economies. With these improvements, we find some support for the ‘pollution haven’ hypothesis, but the overall evidence is relatively weak and does not survive numerous robustness checks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2966.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2966
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  1. Damania, Richard & Fredriksson, Per G. & List, John A., 2003. "Trade liberalization, corruption, and environmental policy formation: theory and evidence," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 490-512, November.
  2. Kaufman, Daniel & Shang-Jin Wei, 1999. "Does"grease money"speed up the wheels of commerce?," Policy Research Working Paper Series 2254, The World Bank.
  3. Yuquing Xing & Charles Kolstad, 2002. "Do Lax Environmental Regulations Attract Foreign Investment?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 1-22, January.
  4. Kenneth A. Froot, 1993. "Foreign Direct Investment," NBER Books, National Bureau of Economic Research, Inc, number froo93-1, August.
  5. Javorcik, Beata, 1999. "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights in Transition Economies," CEPR Discussion Papers 2228, C.E.P.R. Discussion Papers.
  6. Letchumanan, Raman & Kodama, Fumio, 2000. "Reconciling the conflict between the 'pollution-haven' hypothesis and an emerging trajectory of international technology transfer," Research Policy, Elsevier, vol. 29(1), pages 59-79, January.
  7. Daniel Kaufmann & Shang-Jin Wei, 2000. "Does 'Grease Money' Speed Up the Wheels of Commerce?," IMF Working Papers 00/64, International Monetary Fund.
  8. Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
  9. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  10. Eskeland, Gunnar S. & Harrison, Ann E., 1997. "Moving to greener pastures : multinationals and the pollution-haven hypothesis," Policy Research Working Paper Series 1744, The World Bank.
  11. Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April.
  12. Smarzynska, Beata K. & Shang-Jin Wei, 2000. "Corruption and the composition of foreign direct investment - firm-level evidence," Policy Research Working Paper Series 2360, The World Bank.
  13. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
  14. Hans-Peter Lankes & A. J. Venables, 1996. "Foreign direct investment in economic transition: the changing pattern of investments," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(2), pages 331-347, October.
  15. Klaus E Meyer, 1995. "Direct Foreign Investment in Eastern Europe the Role of Labor Costs," Comparative Economic Studies, Palgrave Macmillan, vol. 37(4), pages 69-88, December.
  16. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
  17. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 5-29, October.
  18. Dean, Judith M., 1992. "Trade and the environment : a survey of the literature," Policy Research Working Paper Series 966, The World Bank.
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