FDI and environmental regulation: pollution haven or a race to the top?

Abstract

Increasing foreign direct investment (FDI) flows accompanied with globalization have raised the concern of a "race to the bottom" phenomenon in environmental protection. This is because footloose investors of "dirty" industries tend to relocate to "pollution havens" of the developing world. However when pollutant is transboundary (as in the case of greenhouse gases), the source country's incentive to relocate and the recipient country's willingness to host such industries are not straightforward. This article studies the relationship between FDI and environmental regulation using a North-South market share game model in a two-country setting, when pollution is transboundary. Contrary to the pollution haven hypothesis, our model shows that if market sizes of the two countries are small, FDI will raise the emission standard of the host country, resulting in a "race-to-the-top" phenomenon; but if market sizes are large enough, FDI will not change the emission standard of the South (from its laxest form), a finding that is consistent with the "regulatory chill" argument. Equilibrium FDI is contingent on the fixed cost of FDI, as the traditional proximity-concentration tradeoff theory predicts.

Proportionate and disproportionate policy responses to climate change: core concepts and empirical applications

“…Here, the underlying mechanism is that footloose investors relocate their polluting industries to 'pollution havens' in parts of the world where the environmental standards are less strict. This can induce governments to deliberately lower their standards to a level below what is possible given the available technology ('race to the bottom'), or to maintain their standards and not to increase them further ('regulatory chill') (Bernauer & Caduff, 2004;Burns & Tobin, 2016;Dong, Gong, & Zhao, 2012). In these circumstances, we expect economic considerations to be the main driver of disproportionate policy responses, which are primarily motivated by the desire of policymakers to attain other (in our case, 'non' climate) policy goals.…”

Spatial Econometric Model Analysis of Foreign Direct Investment and Haze Pollution in China

“…Using a north-south market share game model in a two-country setting, Dong et al (2012) studied the relationship between FDI and environmental regulation. Results show that if both market sizes are small, FDI will increase host countries' emission standard, resulting in a "race-to-the-top" effect, but if both market sizes are large enough, FDI will not change emission standards [21]. Tang and Tan (2015) also investigate the dynamic relationship between carbon dioxide (CO 2 ) emissions and FDI in Vietnam.…”

Diversified Agglomeration, Specialized Agglomeration, and Emission Reduction Effect—A Nonlinear Test Based on Chinese City Data

“…This is because, first, during the development process of specialized agglomeration from formation through growth to maturation, resources allocation is continuously optimized in a cluster; the knowledge and technology spillover resulting from manufacturing agglomerations can promote technological progress. This may stimulate enterprises in agglomeration regions to adopt more advanced, environmentally friendly production technologies, which can effectively reduce pollutant emissions (Baomin et al, 2012;Pessoa, 2014;Galliano et al, 2015) [71][72][73]. Second, the production activities of the same industry within a specialized cluster typically generate the same or similar pollutants; therefore, public pollution control facilities can realize specialized operations and create a scale effect (Berliant, 2013;Costantini, 2014) [74,75].…”