Are Foreign Investors Attracted to Weak Environmental Regulations? Evaluating the Evidence from China

At the center of the pollution haven debate is the claim that foreign investors from industrial countries are attracted to weak environment regulations in developing countries. Some recent location choice studies have found evidence of this attraction, but only for inward FDI in industrial countries. The few studies of inward FDI in developing countries have been hampered by weak measures of environmental stringency and by insufficient data to estimate variation in firm response by pollution intensity. This paper tests for pollution haven behavior by estimating the determinants of location choice for equity joint ventures (EJVs) in China. Beginning with a theoretical framework of firm production and abatement decisions, we derive and estimate a location choice model using data on a sample of EJV projects, Chinese effective levies on water pollution, and Chinese industrial pollution intensity. Results show EJVs in highly-polluting industries funded through Hong Kong, Macao, and Taiwan are attracted by weak environmental standards. In contrast, EJVs funded from non-ethnically Chinese sources are not significantly attracted by weak standards, regardless of the pollution intensity of the industry. These findings are consistent with pollution haven behavior, but not by investors from high income countries and only in industries that are highly polluting. Further investigation into differences in technology between industrial and developing country investors might shed new light on this debate.

Bibliographic Details

Main Authors:	Dean, Judith M., Lovely, Mary E., Wang, Hua
Format:	Journal Article biblioteca
Language:	EN
Published:	2009
Subjects:	Multinational Firms, International Business F230, Economic Development: Agriculture, Natural Resources, Energy, Environment, Other Primary Products O130, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance O160, Socialist Systems and Transitional Economies: Natural Resources, Environment P280, Air Pollution, Water Pollution, Noise, Hazardous Waste, Solid Waste, Recycling Q530, Environmental Economics: Government Policy Q580, Other Production and Pricing Analysis R320,
Online Access:	http://hdl.handle.net/10986/5603
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