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

• Published in: Journal of development economics Vol. 90; no. 1; pp. 1 - 13
• Main Authors: Dean, Judith M., Lovely, Mary E., Wang, Hua
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.09.2009; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Development Economics
• Subjects: Air Pollution; China; Corporate Finance and Governance O160; Developing countries; Economic Development: Agriculture; Economic Development: Financial Markets; Economic models; Energy; Environment; Environment P280; Environmental Economics: Government Policy Q580; Environmental policy; Environmental protection; Environmental regulation; Environmental regulations; Foreign direct investment; Foreign enterprises; Foreign investment; Foreign investment Pollution Environmental regulation China; Hazardous Waste; Industrial pollution; International Business F230; Joint ventures; LDCs; Multinational Firms; Natural Resources; Noise; Other Primary Products O130; Other Production and Pricing Analysis R320; Pollution; Recycling Q530; Regulatory policy; Saving and Capital Investment; Site selection; Socialist Systems and Transitional Economies: Natural Resources; Solid Waste; Studies; Water Pollution; Hong Kong; China; Taiwan; Macao; China, People's Rep., Hong Kong; China, People's Rep; Pollution; Q56; F23; China; Foreign investment; F18; Environmental regulation
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2008.11.007

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.