Do Stringent Environmental Policies Deter FDI? M&A versus Greenfield

Sylwia Bialek,Alfons J Weichenrieder

doi:10.1007/s10640-021-00600-x

Abstract

Strict environmental regulation may deter foreign direct investment (FDI). The paper develops the hypothesis that regulation predominantly discourages FDI that is conducted as Greenfield investment rather than mergers and acquisitions (M&A). The hypothesis is tested with German firm-level FDI data. Empirically, stricter regulation reduces new Greenfield projects in polluting industries, but indeed has a much smaller impact on the number of M&As. This significant difference is compatible with the fact that existing operations often benefit from grandfathering rules, which provide softer regulation for pre-exisiting plants, and with the expectation that for M&As part of the regulation is capitalized in the purchase price. The heterogeneous effects help explaining mixed results in previous studies that have neglected the mode of entry.

Highlights

According to the pollution haven hypothesis (PHH), differences in environmental regulation change patterns of trade and foreign direct investment (FDI), causing polluting economic activities to relocate from environmentally stringent jurisdictions to more lenient ones.When it comes to the FDI channel, the theoretical predictions on pollution havens have gained only mixed empirical support on the macro and micro levels.1 many studies find support for the PHH, a considerable share of the publications indicates a small or non-existent impact of environmental regulations on investment patterns.The mixed findings could be due to a heterogeneity in the FDI that was not controlled for in the studies
In specifying the differences in operating profits between the vintages in Equation (4), we assume that only environmental regulation and corporate taxation affect the entry modes differently
The only variable that significantly affects the likelihood of Greenfield investments is the preexisting stock of foreign direct investment in the respective country, which suggests that Greenfield investments benefit from prior experience of foreign investors

Summary

Introduction

According to the pollution haven hypothesis (PHH), differences in environmental regulation change patterns of trade and foreign direct investment (FDI), causing polluting economic activities to relocate from environmentally stringent jurisdictions to more lenient ones.When it comes to the FDI channel, the theoretical predictions on pollution havens have gained only mixed empirical support on the macro and micro levels. many studies find support for the PHH, a considerable share of the publications indicates a small or non-existent impact of environmental regulations on investment patterns.The mixed findings could be due to a heterogeneity in the FDI that was not controlled for in the studies. According to the pollution haven hypothesis (PHH), differences in environmental regulation change patterns of trade and foreign direct investment (FDI), causing polluting economic activities to relocate from environmentally stringent jurisdictions to more lenient ones. When it comes to the FDI channel, the theoretical predictions on pollution havens have gained only mixed empirical support on the macro and micro levels.. In this paper we propose that the mode of entry – an important characteristic of investments that has been neglected in the PHH studies – is such a heterogeneity factor.

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