National Government Interventions in a Global Arena
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Edited by Frank Wijen, Kees Zoeteman, Jan Pieters and Paul van Seters
Chapter 2: Environmental Policy Stringency and Foreign Direct Investment
2. Environmental Policy Stringency and Foreign Direct Investment Margarita Kalamova and Nick Johnstone1 SUMMARY Previous studies of the impact of regulatory stringency on incoming foreign direct investment (FDI) show inconclusive evidence. Drawing on FDI statistics and managerial perception of regulatory stringency for a large number of countries, we examine FDI flows from developed source countries to developing host countries. We find statistically significant but weak support for the existence of pollution havens, which reverses, though, for very lax regulatory regimes. We conclude that very stringent regimes discourage FDI owing to relatively high production costs, intermediate levels of stringency are costless owing to economies of standardisation, and very lax environmental regimes deter FDI since they signal regulatory uncertainty. INTRODUCTION Multinational enterprise (MNE) activity in the form of FDI has grown at a faster rate than most other international transactions, particularly trade flows between countries. The decisions of MNEs to service a foreign market through affiliate production depend on a number of factors, including the way governments shape the investment climates in the targeted locations. While governments have limited influence on factors such as geography, they compete with each other on the provision of infrastructure, the functioning of factor markets, broader governance features such as corruption, and in particular, approaches to taxation and regulation. The role of environmental regulation in inducing FDI 1 The views expressed here are those of the authors and do not necessarily reflect the opinions of the Organisation for Economic Co-operation and Development (OECD) or its member countries....
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