Environmental Regulations, Outward FDI and Heterogeneous Firms: Are Countries Used as Pollution Havens?

Abstract

We consider whether pollution-intensive FDI tends to outflow from a country which maintains stringent environmental regulations and into countries with weak environmental regulations. We consider this issue by incorporating the predictions from the recent heterogeneous firm models of international trade into an empirical model of outward FDI by UK firms. We find that environmental regulations are not a robustly significant determinant of the internationalisation decision, but a pollution-intensive multinational enterprise’s location decision will be affected by the environmental regime in place in the host country. Any deterrent effect is however highly conditional upon other factors, notably corruption.Pollution haven; Foreign investment; Environmental regulation