Sunday, May 03, 2009

Foreign Direct Investment and the Pollution Haven Hypothesis"

Having written extensively on the pollution haven hypothesis I need to keep up to speed. This looks like a promising approach but for a single sector (one that is most likely to result in a positive effect.

"Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis"

Environmental and Resource Economics, Forthcoming
Economic Research Initiatives at Duke (ERID) Research Paper No. 22

ULRICH J. WAGNER, Universidad Carlos III de Madrid - Department of Economics, London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)
Email: uwagner@eco.uc3m.es
CHRISTOPHER TIMMINS, Duke University - Department of Economics
Email: christopher.timmins@duke.edu

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.


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3 comments:

Camera said...

I don't know why anyone would want the Sewell & Marbury Investment Bank in Bourne Ultimatum deciding anything.

shinn said...

I believe that the pollution haven hypothesis would continue to gain traction until there's a substantial effort to curb greenhouse gases in the first world. For instance, the lack of a clear investment policy statement would only highlight the stark disparity between industrialized and non-industrialized economies.

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