Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?
University of Nottingham Research Paper No. 2004/20
26 Pages Posted: 2 Aug 2005
We suggest a novel perspective on the relationship between the stringency of environmental policies and foreign direct investment (FDI). We develop a political economy model with imperfect product market competition where local and foreign firms jointly lobby the local government for a favorable pollution tax. FDI is found to affect environmental policy, and the effect is conditional on the local government's degree of corruptibility. If the degree of corruptibility is sufficiently high (low), FDI leads to less (more) stringent environmental policy, and FDI thus contributes to (mitigates) the creation of a pollution haven. Our empirical results using panel data from 33 countries support the model's predictions.
Keywords: Pollution Haven Hypothesis, FDI, Environmental Policy, Political Economy Corruption
JEL Classification: F18, F21, D72, D73, Q28
Suggested Citation: Suggested Citation