Monday, February 05, 2007

Interdependence and Pollution Havens

This research paper extends traditional pollution haven analysis to consider quite rightly spatial effects. Anecdotally spatial spillovers are intuitive and it is good to see empricial reseach emerging.

Assessing the Pollution Haven Hypothesis in an Interdependent World
Date: 2007-01
By: David Drukker (StataCorp)
Daniel Millimet (SMU)


After proposing a simple theoretical framework to illustrate the importance of third-country effects in empirical studies of the Pollution Haven Hypothesis, we test the model using state-level panel data on inbound US FDI and relative abatement costs. Our analysis reveals that while own state attributes rarely have statistically significant effects on own inbound FDI when aggregated over all manufacturing sectors, many neighboring state attributes do matter. Moreover, the theoretical model does well in explaining FDI in the chemical sector; we tend to find significant effects in the correct direction of variables designed to reflect market demand and production costs. Finally, we consistently find a negative impact of own environmental stringency on inbound FDI in the chemical sector; the impact of neighboring environmental stringency is also statistically significant, but the impact is negative on average, contrary to our initial expectations. Nonetheless, the fact that the impact of more stringent environmental regulations spillover across states indicates that future research into the validity of the PHH must account for spatial spillovers.
Keywords: Foreign Direct Investment, Environmental Regulation, Spillovers, Spatial Econometrics
JEL: C31 F21 Q52

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