Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China

Abstract

a b s t r a c tAt the center of the pollution haven debate is the claim that foreign investors from industrial countries are attracted to weak environment regulations in developing countries. Some recent location choice studies have found evidence of this attraction, but only for inward FDI in industrial countries. The few studies of inward FDI in developing countries have been hampered by weak measures of environmental stringency and by insufficient data to estimate variation in firm response by pollution intensity. This paper tests for pollution haven behavior by estimating the determinants of location choice for equity joint ventures (EJVs) in China. Beginning with a theoretical framework of firm production and abatement decisions, we derive and estimate a location choice model using data on a sample of EJV projects, Chinese effective levies on water pollution, and Chinese industrial pollution intensity. Results show EJVs in highly-polluting industries funded through Hong Kong, Macao, and Taiwan are attracted by weak environmental standards. In contrast, EJVs funded from nonethnically Chinese sources are not significantly attracted by weak standards, regardless of the pollution intensity of the industry. These findings are consistent with pollution haven behavior, but not by investors from high income countries and only in industries that are highly polluting. Further investigation into differences in technology between industrial and developing country investors might shed new light on this debate.Published by Elsevier B.V.

Heterogeneous Human Capital and Environment Influence Mechanism of FDI: An Empirical Research Based on the Panel Data Derived from Provinces of China

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“…Consensus in literature have re-echoed the fact that environmental pollution À which include the depletion of the atmospheric and natural condition of a particular place as a result of the activities of economic agents À has largely been prevalent as a result of the activities of foreign investors . The main debate that stems from this postulation is the pollution haven hypothesis, which claims that foreign investors are attracted to countries with weak environmental regulations like some developing countries (Cole, Elliott, & Wu, 2008;Dean, Lovely, & Wang, 2009;He, 2006;Kellenberg, 2009). …”

Corporate Social Responsibility and the Pollution Haven Hypothesis: Evidence from Multinationals’ Investment Decision in China

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