Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?

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 pol...

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Bibliographic Details
Published in:	The Scandinavian journal of economics 2006-03, Vol.108 (1), p.157-178
Main Authors:	Cole, Matthew A., Elliott, Robert J. R., Fredriksson, Per G.
Format:	Article
Language:	eng
Subjects:	Corruption D72 D73 Economic models Empirical tests Environmental degradation Environmental economics Environmental policy Environmental pollution Environmental regulation F18 FDI Foreign direct investment Foreign direct investments Foreign investment F 21 Gasoline Government corruption Green taxes International environmental policy Lobbying Political corruption Political economy Pollution Pollution haven hypothesis Q28 Studies
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Summary:	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 predictions of the model.
ISSN:	0347-0520 1467-9442 1467-9442