Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?

Abstract

The "pollution haven"
\n hypothesis refers to the possibility that multinational
\n firms, particularly those engaged in highly polluting
\n activities, relocate to countries with weaker environmental
\n standards. Despite the plausibility and popularity of this
\n hypothesis, there is little evidence to support it. The
\n authors identify four obstacles that may have impeded
\n researchers' ability to find evidence in favor of the
\n "pollution haven" hypothesis: 1) The possibility
\n that some features of host countries, such as bureaucratic
\n corruption, may deter inward foreign direct investment and
\n also be positively correlated with lax environmental
\n standards. Omitting this information in statistical analyses
\n may produce misleading results. 2) The possibility that
\n country- or industry-level data, typically used in the
\n literature, may have masked the effect at the firm level. 3)
\n Difficulties associated with measuring environmental
\n standards of the host countries. 4) Difficulties associated
\n with the measuring the pollution intensity of the
\n multinational firms. The authors attempt to surmount these
\n obstacles by explicitly taking into account corruption in
\n host countries and using a firm-level data set on investment
\n projects in 24 transition economies. With these
\n improvements, the authors find some support for the
\n "pollution haven" hypothesis, but evidence is
\n still weak and does not survive numerous robustness checks.