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Strict environmental policy: An incentive for FDI

Author

Listed:
  • Bouwe R. Dijkstra

    (University of Nottingham)

  • Anuj J. Mathew
  • Arijit Mukherjeea

    (University of Nottingham)

Abstract

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.

Suggested Citation

  • Bouwe R. Dijkstra & Anuj J. Mathew & Arijit Mukherjeea, 2011. "Strict environmental policy: An incentive for FDI," Faculty Working Papers 08/11, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp0811
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Trade and Environment; Foreign Direct Investment; Emission tax- ation;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F18 - International Economics - - Trade - - - Trade and Environment
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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