Foreign Direct Investment and Environmental Taxes
43 Pages Posted: 12 Aug 2008
Date Written: July 31, 2008
This paper studies the effect of foreign direct investment (FDI) on environmental policy stringency in a two-country model with trade costs, where FDI could be unilateral and bilateral and both governments address local pollution through environmental taxes. We show that FDI does not give rise to ecological dumping because the host country has an incentive to shift rents away from the source country towards the host country. Environmental policy strategies and welfare effects are studied under the assumption that parameter values support FDI to be profitable.
Keywords: Foreign direct investment, environmental taxes, multinational enterprises, plant location
JEL Classification: F12, F18, F23
Suggested Citation: Suggested Citation