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Environmental Regulation and Foreign Direct Investments: Evidence from a new measure of environmental stringency

Author

Listed:
  • Raphaël Chiappini

    (University of Bordeaux)

  • Enea Gerard

    (University of Bordeaux)

Abstract

This paper investigates the impact of environmental regulations on inward foreign direct investment (FDI) using a novel index that distinguishes between the implementation and enforcement of environmental policy across 111 countries from 2001 to 2018. Leveraging bi- lateral FDI data and a structural gravity model, we find robust evidence of a Pollution Haven Effect: stricter environmental regulations in host countries are associated with lower inward FDI. The effect is more pronounced in emerging markets and in environments with higher corruption. Importantly, we show that FDI responds more strongly to policy implementation, capturing formal regulatory commitment, than to enforcement, measured as deviations be- tween predicted and actual emissions. In addition, bilateral FDI patterns are shaped by the environmental stringency gap between source and host countries, consistent with regulatory arbitrage behavior.

Suggested Citation

  • Raphaël Chiappini & Enea Gerard, 2025. "Environmental Regulation and Foreign Direct Investments: Evidence from a new measure of environmental stringency," Working Papers 2025.9, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2025.9
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    File URL: https://infer-research.eu/wp-content/uploads/2024/11/WP2025.09.pdf
    File Function: First version, 2025
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    More about this item

    Keywords

    Environmental regulation; foreign direct investment; Pollution Haven Hypothesis;
    All these keywords.

    JEL classification:

    • F - International Economics
    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics

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