Do Environmental Regulations Effect FDI Decisions? The Pollution Haven Hypothesis Revisited

24 Pages Posted: 31 Jul 2017

See all articles by Haeyeon Yoon

Haeyeon Yoon

University of Bristol - Department of Economics

Almas Heshmati

Sogang University; Jönköping International Business School


In an attempt to verify the pollution haven hypothesis, this study investigates the impact of environmental regulations on foreign direct investment (FDI). We use Korean outward FDI data covering the manufacturing sector for 2009-15. The study not only considers the stringency but also the enforcement of environmental regulations when measuring the degree of the host country's environmental regulations. Since the pollution haven's effects indicate moving the polluting production stages from the home country to other (host) countries, we distinguish between investments in the 'production' part from that in the non-production part using location information about the host country. The main results of the estimation of a FDI model show that the stricter the regulations in host countries in Asia the lower the FDI both intensively and extensively to those countries. This supports the prevalence of the effects of pollution havens. However, before we separate the FDI into the production part, the effect of environmental regulations on FDI is hindered by the FDI in the non-production part. The results indicate that environmental regulations are determinants of FDI in the production part, while environmental regulations do not have a significant effect on FDI decisions when the entire FDI is considered.

Keywords: pollution haven hypothesis, environmental regulation, foreign direct investment

JEL Classification: F23, K32, L51, Q56

Suggested Citation

Yoon, Haeyeon and Heshmati, Almas, Do Environmental Regulations Effect FDI Decisions? The Pollution Haven Hypothesis Revisited. IZA Discussion Paper No. 10897, Available at SSRN: or

Haeyeon Yoon (Contact Author)

University of Bristol - Department of Economics ( email )

8 Woodland Road
Bristol BS8 ITN
United Kingdom

Almas Heshmati

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)
0082-2-705-8771 (Phone)


Jönköping International Business School ( email )

Jönköping, 551 11

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