The Karmic Debt of Pollution Haven Hypothesis: Subnational Environmental Regulatory Pressure and Foreign Divestment from an Emerging Market

Abstract

The pollution haven hypothesis (PHH) is widely used to explain the predatory relocation of foreign investors to emerging markets. However, the long-term effect of the PHH remains a mystery, given the natural evolution of environmental regulations. This study proposes that the likelihood of foreign divestment in the emerging market increases when the regional environmental regulatory pressure becomes more stringent. Empirical support is obtained through a Cox proportional hazard model of 402 international joint ventures established in China in 2000, whose foreign divestment status is traced until 2017. The findings support the karmic debt of the PHH, that is, foreign investors’ focus on avoiding environmental regulatory costs by relocating to emerging markets in the short run will backfire in the long run unless they bring something of value to the host market.