Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis Articles uri icon

authors

  • WAGNER, ULRICH J
  • TIMMINS, CHRISTOPHER

publication date

  • June 2009

start page

  • 231

end page

  • 256

issue

  • 2

volume

  • 43

International Standard Serial Number (ISSN)

  • 0924-6460

Electronic International Standard Serial Number (EISSN)

  • 1573-1502

abstract

  • Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into "pollution havens"? We test this hypothesis using panel data on outward foreign direct investment (FDI) flows of various industries in the German manufacturing sector and account for several econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that externalities associated with FDI agglomeration can bias estimates away from finding a pollution haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for agglomeration and employ a GMM estimator to control for endogenous, time-varying determinants of FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to break the possible correlation between environmental regulatory stringency and unobservable attributes of FDI recipients in the cross-section. When accounting for these issues we find robust evidence of a pollution haven effect for the chemical industry.