Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?

University of Nottingham Research Paper No. 2004/20

26 Pages Posted: 2 Aug 2005

See all articles by Matthew A. Cole

Matthew A. Cole

University of Birmingham - Department of Economics

Robert J.R. Elliott

University of Birmingham - Department of Economics

Per G. Fredriksson

University of Louisville - College of Business - Department of Economics; Institute for Corruption Studies

Multiple version iconThere are 2 versions of this paper

Abstract

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

Cole, Matthew A. and Elliott, Robert James Ross and Fredriksson, Per G., Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?. University of Nottingham Research Paper No. 2004/20, Available at SSRN: https://ssrn.com/abstract=764124 or http://dx.doi.org/10.2139/ssrn.764124

Matthew A. Cole (Contact Author)

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

Robert James Ross Elliott

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

Per G. Fredriksson

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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