Forthcoming Scandinavian
Journal of Economics
Endogenous Pollution Havens: Does FDI
Influence Environmental Regulations?
Matthew A. Colea*
Robert J.R. Elliotta
Per G. Fredrikssonb
April 8, 2005
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 Codes: F18, F21, D72, D73, Q28.
a Department of Economics, University of Birmingham,
Birmingham, B15 2TT, UK.
b Department of Economics, Southern Methodist
University, PO Box 0496, Dallas, TX 75275-0496.
* We would
like to thank the three helpful referees, Jonas Agell, Sangeeta Bansal, Jayasri
Dutta, Angeliki Kourelis, John List, Daniel Millimet and participants at presentations at Rice University, SMU, and the EAERE
meetings in Budapest for helpful comments and discussions, and Jakob
Svensson for some of the data. This paper was started while Fredriksson visited
the Department of Economics, University of Gothenburg, and he thanks the
department for its hospitality. Cole and Elliott gratefully acknowledge the
support of ESRC grant number RES-000-22-0016 and Leverhulme Trust grant number F/00094/AG.
Fredriksson gratefully acknowledge support from the Malmsten Foundation and the
University of Gothenburg Jubilee Fund (Elof Hansson’s Foundation Gift), and SMU
travel funds. The usual disclaimers
apply.