Environmental and Resource Economics

, Volume 41, Issue 3, pp 289–313

Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis

Article

Abstract

Foreign direct investment (FDI) flows into developing countries have been increasing dramatically over the past decade. At the same time, there has been widespread concern that lax environmental standards are in part responsible for this surge. This paper revisits the question of the existence of a pollution haven effect by examining the extent to which the pollution intensity of production helps explain FDI in Mexico. We focus on pollution intensities, which are directly related to emission regulations, rather than unobservable pollution taxes and allow for substitution between capital and pollution. Examining several different pollutants, we find a positive correlation between FDI and pollution that is statistically and economically significant in the case of the highly regulated sulfur dioxide emissions. Industries for which the estimated relationship between FDI and pollution is positive receive up to 30% of total FDI and 30% of manufacturing output. Although we confirm the importance of Mexico’s comparative advantage in labor-intensive production processes, consistent with the previous literature, our results suggest that environmental considerations may matter as well for firms’ investment decisions.

Keywords

Foreign direct investment Pollution haven Mexico 

JEL Classification

F21 F23 Q38 

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Copyright information

© Springer Science+Business Media B.V. 2008

Authors and Affiliations

  1. 1.Department of EconomicsColby CollegeWatervilleUSA
  2. 2.Department of Agricultural and Resource EconomicsOregon State UniversityCorvallisUSA

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