Environmental Regulation: An Incentive for FDI

University of Nottingham Research Paper No. 2006/38

28 Pages Posted: 30 Nov 2006

See all articles by Bouwe Dijkstra

Bouwe Dijkstra

University of Nottingham - School of Economics

Anuj Mathew

University of Nottingham

Arijit Mukherjee

University of Nottingham - School of Economics

Date Written: 2006

Abstract

Empirical evidence has so far failed to find firm support for the Pollution Haven Hypothesis that lenient environmental regulation attracts investment from polluting firms. We show that a firm may want to relocate to a country with stricter environmental regulation, when the move raises its rival's cost by sufficiently more than its own. We model a Cournot duopoly with a foreign and an incumbent domestic firm. When the foreign firm moves to the home country, the domestic government will respond by increasing the environmental tax rate. This may hurt the domestic firm more than the foreign firm thus making it profitable for the foreign firm to relocate rather than to export.

Keywords: Government Environmental Policy, Emission taxes, Environmental Damage, Foreign Direct Investment, Trade

JEL Classification: F12, F18, F21, Q50, Q58

Suggested Citation

Dijkstra, Bouwe and Mathew, Anuj and Mukherjee, Arijit, Environmental Regulation: An Incentive for FDI (2006). University of Nottingham Research Paper No. 2006/38. Available at SSRN: https://ssrn.com/abstract=948211 or http://dx.doi.org/10.2139/ssrn.948211

Bouwe Dijkstra (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 8467205 (Phone)
+44 115 9514159 (Fax)

Anuj Mathew

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Arijit Mukherjee

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 9514733 (Phone)
+44 115 9514159 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
182
Abstract Views
2,291
rank
166,744
PlumX Metrics