Environmental and Resource Economics

, Volume 43, Issue 2, pp 231–256 | Cite as

Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

Article

Abstract

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.

Keywords

Agglomeration effects Congestion effects Environmental regulation Foreign direct investment German manufacturing Panel data Pollution havens 

JEL Classification

F18 F23 Q52 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58: 277–297CrossRefGoogle Scholar
  2. Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econom 68(1): 29–51CrossRefGoogle Scholar
  3. Barrett S (2003) Environment & statecraft. Oxford University Press, Cambridge, MACrossRefGoogle Scholar
  4. Brainard SL (1997) An empirical assessment of the proximity-concentration trade-off between multinational sales and trade. Am Econ Rev 87(4): 520–544Google Scholar
  5. Brunnermeier S, Levinson A (2004) Examining the evidence on environmental regulations and industry location. J Environ Dev 13(1): 6–41CrossRefGoogle Scholar
  6. Bryk AS, Raudenbush SW (1992) Hierarchical linear models: applications and data analysis methods, Vol. I of advanved qualitative techniques in the social sciences. Sage Publications, Newbury Park, CAGoogle Scholar
  7. Buch C, Kleinert J, Lipponer A, Toubal F (2005) Determinants and effects of foreign direct investment: evidence from German firm-level data. Econ Policy 41: 51–110Google Scholar
  8. Cheng LK, Kwan YK (2000) What are the determinants of the location of foreign direct investment? The Chinese experience. J Int Econ 51: 379–400CrossRefGoogle Scholar
  9. Cole MA, Elliot RJR (2005) FDI and the capital intensity of “dirty” sectors: a missing piece of the pollution haven puzzle. Rev Dev Econ 9(4): 530–548CrossRefGoogle Scholar
  10. Cole MA, Elliot RJ, Fredriksson PG (2006) Endogenous pollution havens: does FDI influence environmental regulations. Scand J Econ 108(1): 157–178CrossRefGoogle Scholar
  11. Copeland B, Taylor MS (2004) Trade, growth and the environment. J Econ Lit 42: 7–71CrossRefGoogle Scholar
  12. David PA, Rosenbloom JL (1990) Marshallian factor market externalities and the dynamics of industrial location. J Urban Econ 28: 349–370CrossRefGoogle Scholar
  13. Döhrn, R (2002) Bestimmungsgründe und Auswirkungen von Direktinvestitionen der deutschen chemischen Industrie, RWI-Papiere 79, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, EssenGoogle Scholar
  14. Ederington J, Levinson A, Minier J (2005) Footloose and pollution-free. Rev Econ Stat 87(1): 92–99CrossRefGoogle Scholar
  15. Elliot RJR, Shimamoto K (2008) Are ASEAN countries havens for Japanese pollution-intensive industry. World Econ 31(2): 236–254CrossRefGoogle Scholar
  16. Eskeland GS, Harrison AE (2003) Moving to greener pastures? Multinationals and the pollution haven hypothesis. J Dev Econ 70: 1–23CrossRefGoogle Scholar
  17. FAO (2007) ForesSTAT, online database, Food and Agricultural Organization, Rome. Available online at http://faostat.fao.org/site/381/default.aspx
  18. Glaeser E (1999) Learning in cities. J Urban Econ 46: 254–277CrossRefGoogle Scholar
  19. Goldstein G, Gronberg T (1984) Economies of scope and economies of agglomeration. J Urban Econ 16: 91–104CrossRefGoogle Scholar
  20. Grether JM, de Melo J (2004) Globalization and dirty industries: do pollution havens matter? In: Baldwin RE, Winters LA (eds) Challenges to globalization: analyzing the economics. University of Chicago Press, Chicago, ILGoogle Scholar
  21. Hanna R (2004) US environmental regulation and FDI: evidence from a panel of US based multinational firms, job market paper. Massachusetts Institute of Technology, Cambridge, MAGoogle Scholar
  22. Hausman JA, Taylor WE (1981) Panel data and unobservable indicidual effects. Econometrica 49: 1377–1398CrossRefGoogle Scholar
  23. Head K, Mayer T (2004) Market potential and the location of Japanese investment in the European Union. Rev Econ Stat 86(4): 959–972CrossRefGoogle Scholar
  24. Head K, Ries J, Swenson D (1995) Agglomeration benefits and location choice: evidence from Japanese manufacturing investments in the United States. J Int Econ 38: 223–247CrossRefGoogle Scholar
  25. Hilber CAL, Voicu I (2006) Agglomeration economies and the location of foreign direct investment: empirical evidence from Romania, Mimeo. London School of Economics, London, UKGoogle Scholar
  26. Jaffe AB, Peterson SR, Portney PR, Stavins RN (1995) Environmental regulation and the competitiveness of US manufacturing: what does the evidence tell us? J Econ Lit 33: 132–163Google Scholar
  27. Jeppesen T, List JA, Folmer H (2002) Environmental regulations and new plant location decisions: evidence from a meta-analysis. J Reg Sci 42(1): 19–49CrossRefGoogle Scholar
  28. Jorgenson DW (1966) Rational distributed lag functions. Econometrica 34(1): 135–149CrossRefGoogle Scholar
  29. Kellenberg DK (2008) An empirical investigation of the pollution haven effect with strategic environmental and trade policy, Mimeo. Department of Economics, University of MontanaGoogle Scholar
  30. Keller W, Levinson A (2002) Pollution abatement costs and foreign direct investment inflows to US states. Rev Econ Stat 84(4): 691–703CrossRefGoogle Scholar
  31. Kirkpatrick C, Shimamoto K (2007) The effect of environmental regulation on the locational choice of Japanese foreign direct investment. Appl Econ (forthcoming)Google Scholar
  32. Krugman P (1991) Geography and trade. MIT Press, Cambridge, MAGoogle Scholar
  33. Levinson A, Taylor SM (2008) Unmasking the pollution haven effect. Int Econ Rev 49(1): 223–254CrossRefGoogle Scholar
  34. List JA, Co CY (2000) The effects of environmental regulations on foreign direct investment. J Environ Econ Manage 40(1): 1–20CrossRefGoogle Scholar
  35. Markusen JR (1995) The boundaries of multinational enterprises and the theory of international trade. J Econ Perspect 9(2): 169–189Google Scholar
  36. Marshall A (1898) Principles of economics. Macmillan, London, UKGoogle Scholar
  37. Millimet DL, List JA (2004) The case of the missing pollution haven hypothesis. J Regul Econ 26(3): 239–262CrossRefGoogle Scholar
  38. Scholz CM, Stähler F (1999) Unilateral environmental policy and international competitiveness, Vol. 299 of Kieler Studien. Mohr Siebeck, TübingenGoogle Scholar
  39. Smarzynska Javorcik BK, Wei S-J (2004) Pollution havens and foreign direct investment: dirty secret or popular myth? Contrib Econ Anal Policy 3(2):Article 8Google Scholar
  40. van Soest DP, List JA, Jeppesen T (2006) Shadow prices, environmental stringency, and international competitiveness. Eur Econ Rev 50: 1151–1167CrossRefGoogle Scholar
  41. Wagner UJ (2001) The design of stable international environmental agreements: economic theory and political economy. J Econ Surv 15(3): 377–411CrossRefGoogle Scholar
  42. Wheeler D, Mody A (1992) International investment location decisions—the case of US firms. J Int Econ 33: 57–76CrossRefGoogle Scholar
  43. World Bank (2007) World development indicators online. Available online. http://devdata.worldbank.org/dataonline/
  44. World Economic Forum (2003) In: Cornelius P, Schwab K (eds) The global competitiveness report 2002–2003. Oxford University Press, Cambridge, MAGoogle Scholar
  45. World Economic Forum (2004) Schwab K, Porter ME, Sala-i-Martin X, Lopez-Carlos A (eds) The global competitiveness report 2003–2004. Oxford University Press, Cambridge, MAGoogle Scholar
  46. Xing Y, Kolstad CD (2002) Do lax environmental regulations attract foreign investment. Environ Resour Econ 21(1): 1–22CrossRefGoogle Scholar
  47. Zeng D-Z, Zhao L (2006) Pollution havens and industrial agglomeration, Mimeo. Kagawa University and Kobe UniversityGoogle Scholar

Copyright information

© Springer Science+Business Media B.V. 2008

Authors and Affiliations

  1. 1.Department of EconomicsUniversidad Carlos III de MadridGetafe (Madrid)Spain
  2. 2.Department of EconomicsDuke UniversityDurhamUSA

Personalised recommendations