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

Judith M. Dean, Mary E. Lovely, Hua Wang

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

At 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 non-ethnically 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.

Original languageEnglish (US)
Title of host publicationInternational Economic Integration and Domestic Performance
PublisherWorld Scientific Publishing Co. Pte Ltd
Pages155-168
Number of pages14
ISBN (Electronic)9789813141094
ISBN (Print)9789813141087
DOIs
StatePublished - Feb 27 2017

Keywords

  • China
  • Environtmental regulation
  • Foregin investment
  • Pollution

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

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  • Cite this

    Dean, J. M., Lovely, M. E., & Wang, H. (2017). Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China. In International Economic Integration and Domestic Performance (pp. 155-168). World Scientific Publishing Co. Pte Ltd. https://doi.org/10.1142/9789813141094_0009