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Strict environmental policy: An incentive for FDI

  • Bouwe R. Dijkstra


    (University of Nottingham)

  • Anuj J. Mathew


  • Arijit Mukherjeea


    (University of Nottingham)

Empirical evidence has so far failed to confirm that lenient environmental regulation attracts investment from polluting firms. We show that a firm may want to relocate to a country with stricter environmental regulation, when the move raises its rival's cost by sufficiently more than its own. We model a Cournot duopoly with a foreign and an incumbent domestic firm. When the foreign firm moves to the home country, the domestic government will respond by increasing the environmental tax rate. This may hurt the domestic firm more than the foreign firm. The home (foreign) country's welfare is (usually) lower with FDI.

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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 08/11.

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Length: 37 pages
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:una:unccee:wp0811
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  9. 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.
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  13. Oster, Sharon, 1982. "The Strategic Use of Regulatory Investment by Industry Sub-Groups," Economic Inquiry, Western Economic Association International, vol. 20(4), pages 604-18, October.
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  16. Tim Jeppesen & John A. List & Henk Folmer, 2002. "Environmental Regulations and New Plant Location Decisions: Evidence from a Meta-Analysis," Journal of Regional Science, Wiley Blackwell, vol. 42(1), pages 19-49.
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