Empirical evidence has so far failed to confirm that lenient environmental regulation
attracts investment from polluting firms. We show that a firm may want to relocate to a
country with stricter environmental regulation, when the move raises its rival's cost by
sufficiently more than its own. We model a Cournot duopoly with a foreign and an
incumbent domestic firm. When the foreign firm moves to the home country, the
domestic government will respond by increasing the environmental tax rate. This may
hurt the domestic firm more than the foreign firm. The home (foreign) country's welfare
is (usually) lower with FDI
