Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis

45 Pages Posted: 2 Apr 2008

See all articles by Andreas Waldkirch

Andreas Waldkirch

Colby College - Department of Economics

Munisamy Gopinath

Oregon State University - Department of Applied Economics

Date Written: March 2008

Abstract

Foreign direct investment (FDI) flows into developing countries have been increasing dramatically over the past decade. At the same time, there has been widespread concern that lax environmental standards are in part responsible for this surge. This paper revisits the question of the existence of a pollution haven effect by examining the extent to which the pollution intensity of production helps explain FDI in Mexico. We focus on pollution intensities, which are directly related to emission regulations, rather than unobservable pollution taxes and allow for substitution between capital and pollution. Examining several different pollutants, we find a positive correlation between FDI and pollution that is statistically and economically significant in the case of the highly regulated sulfur dioxide emissions. Industries for which the estimated relationship between FDI and pollution is positive receive up to 30 percent of total FDI and 30 percent of manufacturing output. Although we confirm the importance of Mexico's comparative advantage in labor-intensive production processes, consistent with the previous literature, our results suggest that environmental considerations may matter as well for firms' investment decisions.

Keywords: Foreign Direct Investment, Pollution Haven, Mexico

JEL Classification: F21, F23, Q38

Suggested Citation

Waldkirch, Andreas and Gopinath, Munisamy, Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis (March 2008). Environmental and Resource Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1115318

Andreas Waldkirch (Contact Author)

Colby College - Department of Economics ( email )

Waterville, ME 04901
United States
207-859-5244 (Phone)
207-859-5229 (Fax)

Munisamy Gopinath

Oregon State University - Department of Applied Economics ( email )

213 Ballard Extension Hall
Corvallis, OR 97331-4501
United States
541-737-1402 (Phone)
541-737-2563 (Fax)

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