Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into “pollution havens”? We test this hypothesis using panel data on outward foreign direct inves...

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Bibliographic Details
Published in:Environmental & resource economics Vol. 43; no. 2; pp. 231 - 256
Main Authors: Wagner, Ulrich J, Timmins, Christopher D
Format: Journal Article
Language:English
Published: Dordrecht Dordrecht : Springer Netherlands 01.06.2009
Springer Netherlands
European Association of Environmental and Resource Economists
Springer Nature B.V
Series:Environmental & Resource Economics
Subjects:
Agglomeration
Agglomeration effects
Agreements
Chemical industry
Competition
Competitive advantage
Competitiveness
Congestion effects
Econometrics
Economic Policy
Economics
Economics and Finance
Endogenous
Environmental Economics
environmental law
Environmental Law/Policy/Ecojustice
Environmental Management
Environmental protection
Environmental regulation
Environmental regulations
Expenditures
Externality
F18
F23
Foreign direct investment
Foreign investment
German manufacturing
Germany
Hypotheses
Industrial concentration
International trade
Manufacturing
Manufacturing industry
Panel data
Plant location
Pollution
Pollution control
Pollution havens
Q52
Regulation
Studies
Germany
Congestion effects
Panel data
German manufacturing
F23
Foreign direct investment
Agglomeration effects
Environmental regulation
F18
Pollution havens
Q52
ISSN:0924-6460, 1573-1502
Online Access:Get full text
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Summary:Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into “pollution havens”? We test this hypothesis using panel data on outward foreign direct investment (FDI) flows of various industries in the German manufacturing sector and account for several econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that externalities associated with FDI agglomeration can bias estimates away from finding a pollution haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for agglomeration and employ a GMM estimator to control for endogenous time-varying determinants of FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to break the possible correlation between environmental regulatory stringency and unobservable attributes of FDI recipients in the cross-section. When accounting for these issues we find robust evidence of a pollution haven effect for the chemical industry.
Bibliography:http://dx.doi.org/10.1007/s10640-008-9236-6
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ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-008-9236-6