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Do Lax Environmental Regulations Attract Foreign Investment?

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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 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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Authors and Affiliations

  1. International Development Program, International University of Japan and Bren School & Department of Economics, University of California, Santa Barbara, CA, 93106-9210, USA

    Yuquing Xing & Charles D. Kolstad

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  1. Yuquing Xing
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  2. Charles D. Kolstad
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Xing, Y., Kolstad, C.D. Do Lax Environmental Regulations Attract Foreign Investment?. Environmental and Resource Economics 21, 1–22 (2002). https://doi.org/10.1023/A:1014537013353

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