Do environmental regulations affect FDI decisions? The pollution haven hypothesis revisited

Abstract

Abstract This study attempts to verify the pollution haven hypothesis by investigating the impact of environmental regulations on foreign direct investment (FDI). It uses Korean outward FDI data covering the manufacturing sector for the period 2009–15. This study not only considers the stringency when measuring the degree of the host country’s environmental regulations but also the enforcement of these environmental regulations. Since the pollution haven’s effects indicate moving the polluting production stages from the home country to other (host) countries, we differentiate between investments in the ‘production’ part from those in the non-production part using location information about the host country. The main results of a FDI’s model estimation show that the stricter the regulations in host countries in Asia, the lower the FDI both intensively and extensively in these countries. This supports the prevalence of the effects of a pollution haven. However, before we separate FDI into the production and non-production parts, the effects of environmental regulations on FDI are hindered by FDI in the non-production part. The results indicate that while environmental regulations are determinants of FDI in the production part, they do not have a significant effect on FDI decisions when the entire FDI is considered.