Do Energy Prices Drive Outward FDI? Evidence from a Sample of Listed Firms

Abstract

Affordable energy is often argued to be a vital condition for manufacturing industries to be able to compete on global markets. Consequently, the idea of introducing a (unilateral) carbon tax is usually opposed on the grounds of potential losses of competitiveness and leakage of economic activity abroad. In this paper, we shed light on one potential channel of such effects-the impact of energy prices on firms' outward FDI. Using an instrumental variable strategy we estimate the longer-term effects on a sample of listed firms from 9 manufacturing sectors in 24 OECD countries over 1995-2008. The results suggest that relative energy prices-that is the difference between domestic energy prices and prices in the potential FDI destination-are significantly and asymmetrically related to firms' outward FDI asset share. Only firms that faced increases in the relative energy prices have increased their international asset position and this effect was relatively small.

Measuring environmental policy stringency in OECD countries

“…The relationships in Figure 15 are based on simple correlations and do not imply a causal relationship. They are in line with the existing evidence showing that stricter environmental policies can significantly reduce carbon emissions and air pollution (OECD, 2021 [9]; Dechezleprêtre, Nachtigall and Venmans, 2018 [27]; Dechezleprêtre, Rivers and Stadler, 2019 [28]). Source: CO2-intensity from WDI (2021 [29]); PM2.5 exposure from OECD (2021 [30]); EPS data from OECD.…”

Distinguishing the Complex Effects of Foreign Direct Investment on Environmental Pollution: Evidence from China

“…Endogeneity might exist between FDI intensity and environmental pollution, because FDI affects environmental pollution in a specific province, but a province with serious pollution can also attract FDI, due to looser environmental control in that province. To clarify the relationship between FDI intensity and environmental pollution, a common approach is to find instrumental variables, to address the endogeneity between them (Garsous et al, 2020). Effective instrumental variables correlate highly with endogenous variables in the model and are strictly exogenous to the dependent variable.…”