Do Stringent Environmental Policies Deter FDI? M&A versus Greenfield

Abstract

Strict environmental regulation may deter foreign direct investment (FDI). The paper develops the hypothesis that regulation predominantly discourages FDI that is conducted as Greenfield investment rather than mergers and acquisitions (M&A). The hypothesis is tested with German firm-level FDI data. Empirically, stricter regulation reduces new Greenfield projects in polluting industries, but indeed has a much smaller impact on the number of M&As. This significant difference is compatible with the fact that existing operations often benefit from grandfathering rules, which provide softer regulation for pre-exisiting plants, and with the expectation that for M&As part of the regulation is capitalized in the purchase price. The heterogeneous effects help explaining mixed results in previous studies that have neglected the mode of entry.

Asian Economic Integration Report 2023

“…Fourth, a similar definition using major sectoral groups is used but the median is defined each year. Last, we employ the classification of Bialek and Weichenrieder (2021) who used pollution abatement as their basis for their classification. This classification is also time invariant.…”

Still Your Grandfather’s Boiler: Estimating the Effects of the Clean Air Act’s Grandfathering Provisions

“…Another cross-country study, reports that the choice of entry modes in foreign direct investment (MA vs greenfield) is consistent with the existence of substantial grandfathering in environmental regulations. Bialek and Weichenrieder (2021) The remainder of the paper is structured as follows. Section 2 provides background information on sulfur emissions occurring as a byproduct of coal combustion, available emission reduction strategies, and various sulfur dioxide regulations in the US.…”