Are Foreign Investors Attracted to Weak Environmental Regulations? Evaluating the Evidence from China

By Judith M. Dean, Mary E. Lovely, Hua Wang. 2005

770 citations recorded by the source corpus.

One of the most contentious debates today is whether pollution-intensive industries from rich countries relocate to poor countries with weaker environmental standards, turning them into pollution havens. Empirical studies to date show little evidence to support the pollution haven hypothesis, but suffer potentially from omitted variable bias, specification, and measurement errors. The authors estimate the strength of pollution-haven behavior by examining the location choices of equity joint venture (EJV) projects in China. They derive a location choice model from a theoretical framework that incorporates the firm's production and abatement decision, agglomeration, and factor abundance. The authors estimate conditional logit and nested logit models using new data sets containing information on a sample of EJV projects, effective environmental levies on water pollution, and estimates of Chinese pollution-intensity for 3-digit ISIC (International Standard Industrial Classification) industries. Results from 2,886 manufacturing joint venture projects from 1993-96 show that EJVs from all source countries go into provinces with high concentrations of foreign investment, relatively abundant stocks of skilled workers, concentrations of potential local suppliers, special incentives, and less state ownership. Environmental stringency does affect location choice, but not as expected. Low environmental levies are a significant attraction only for joint ventures in highly-polluting industries with partners from Hong Kong, Macao, and Taiwan (China). In contrast, joint ventures with partners from OECD sources are not attracted by low environmental levies, regardless of the pollution intensity of the industry. The authors discuss the likely role of technological differences in explaining these results.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/114f43be994a8bf0c71b27a907f80bda21f988a8

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Citations in the corpus

Transboundary pollution in China: a study of polluting firms' location choices in Hebei province (2013, neutral): “at the provincial level2: polluting firms would be attracted to provinces where environmental regulations are less strict (Dean et al., 2009).”
Environmental regulation and firm exports: Evidence from the eleventh Five-Year Plan in China (2018, background): “3 Dean et al. (2009) attribute the insignificant evidence for the PHE to the failure to account for the endogenous environmental regulations. Indeed, a meta-analysis conducted by Jeppesen et al. (2002) points out that much of the variation in findings on the effects of environmental regulations can ”
Industrial CO2 intensity, indigenous innovation and R&D spillovers in China’s provinces (2014, background): “’s [49] firm level study for China supported the fact that high-pollution industries from Hong Kong, Macao, and Taiwan are attracted by weak environmental standards.”
Factors Affecting CO2 Emissions in the BRICS Countries: A Panel Data Analysis (2015, background): “According to the pollution haven hypothesis, weak environmental regulation in a host country may attract inward FDI by profit-driven companies eager to circumvent costly regulatory compliance in their home countries (Jensen, 1996; Hoffmannet al., 2005; Dean et al., 2009).”