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Pollution havens, endogenous environmental policy, and foreign direct investment
Author(s) -
Ferrara Ida,
Missios Paul,
Yildiz Halis Murat
Publication year - 2015
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2013.034
Subject(s) - foreign direct investment , incentive , profit (economics) , damages , business , environmental policy , international economics , environmental pollution , pollution , economics , international trade , natural resource economics , market economy , environmental protection , microeconomics , macroeconomics , environmental science , political science , ecology , biology , law
In an increasingly integrated world economy, countries may have greater incentives to weaken environmental policy as disguised protection intended to give a competitive edge to local firms. This may generate pollution havens as firms relocate in response to different environmental policies. Foreign direct investment (FDI) weakens profit‐shifting policy considerations while increasing environmental damages but, at the same time, may provide external benefits. We derive conditions under which the FDI‐recipient country has an incentive to manipulate its environmental standard to prevent or attract FDI, potentially eliminating or creating pollution havens, in addition to examining the impact of FDI on the equilibrium state of the environment.