Do Polluting Firms Favour the Borders of Jurisdictions?

Abstract

This chapter revisits the “beggar-thy-neighbour” issue in the location choice of polluting firms. Conventional approaches highlight that polluting firms can make use of the trans-boundary pollution to escape environmental regulations. Consequently, they intend to locate in border regions to become a free-rider. This chapter acknowledges that the border effect serves as an attractive determinant for the location choice of polluting industries. However, it argues that concerns for economic performance will trigger polluting firms to stay in regional centres so that they could benefit from various agglomeration externalities. The forces of agglomeration effects would be opposite to the ones of border effects only if the regional centres do not locate in the border regions. They work together to determine the location of polluting firms, which lead to uncertainties on the “beggar-thy-neighbour” phenomenon. Empirical evidence from China reveals that polluting firms avoid border and agglomeration effects dominating their location choice. Nevertheless, a lenient environmental regulation on borders will give rise to the production of dirty outputs. Moreover, local governments lack strong incentives to take advantage of free-rider effects when dealing with environmental pollution, but value the agglomeration effects to boost economic growth.