Impact of Environmental Regulation on FDI-activity of Multinational Enterprises

The OeNB’s Anniversary Fund supports the project "The impact of environmental regulations on FDI-activity of multinational enterprises" submitted by Stefan Borsky, Andrea Leiter-Scheiring, Michael Pfaffermayr and Richard Pirker.
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The research project examines the impact of environmental policy regulation on foreign direct investment (FDI) by multinational companies. The research is motivated by the ongoing debate on whether the stringency of environmental policy has a negative impact on the attractiveness of a business location. The prevailing view is that strict environmental policies have a negative impact on the competitiveness of a business location and lead to lower investment. A lower competitiveness is assumed if polluting companies in countries with strict environmental regulations have to bear high taxes or additional costs for filter systems, etc. These companies have an incentive to move to countries with low environmental regulations and standards, to so-called "pollution havens".

 

In this project we investigate whether – as the pollution haven hypothesis suggests – a negative correlation between stringent environmental policy and FDI can actually be observed. Thereby, the focus is not on calculating the change in FDI volume in response to environmental regulation. Rather, the project concentrates on analysing the redistributive effects of FDI activities between countries when a country's environmental policy measures become more stringent. We aim to answer, among others, the following questions:

 

  • Which countries are particularly sensitive to the environmental policies of other countries?
  • Which countries can expect an increase, and which countries can expect a reduction in foreign direct investment?
  • How would a multilaterally coordinated environmental policy affect the redistribution of FDI?

 

This analysis of the effects of unilateral environmental policies on the attractiveness of countries as business locations and on FDI is of particular interest in a world of multilateral dependencies.

 

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