Abstract
This paper attempts to examine the role of environmental governance on foreign direct investment by testing the pollution haven hypothesis for 21 Indian states for the period 2002–2010. To test for the hypothesis, this study computes an abatement expenditure index adjusted for industrial composition at the state level using Annual Survey of Industries plant-level data. The methodology used is based on that proposed by Levinson ( 2001 ). The index compares actual pollution abatement expenditures in a particular state, unadjusted for industrial composition, to predicted abatement expenditures in the same state. (The predictions are based on nationwide abatement expenditures by industry and each state's industrial composition.) If the adjusted index is low for a state, it implies that the state has poor environmental governance, which would be expected to induce foreign firms to invest. However, the results do not find any evidence of the pollution haven hypothesis in the Indian context. Other infrastructure and market-access-related variables are more important in influencing a foreign firm's investment decisions than environmental stringency.
Highlights
Over the past 3 decades, developing economies have witnessed a significant inflow of foreign direct investment (FDI)
The results suggest that FDI flows to states that are coastal and have high installed capacity, high per capita income, and more domestic investment
This paper examines the impact of environmental governance on FDI by testing the pollution haven hypothesis for 21 Indian states for the period
Summary
Over the past 3 decades, developing economies have witnessed a significant inflow of foreign direct investment (FDI). FDI inflows to developing economies were buttressed by the liberalization process embarked on by many economies in the early 1990s and. 82 Asian Development Review the high growth rates that resulted from such reforms. Many host economies devised suitable incentives to attract FDI. Another reason often cited in the literature is that relatively lenient environmental regulations in an economy can attract FDI. This is a process that has been described as a “race to the bottom” (Grossman and Krueger 1991, Xing and Kolstad 1998). This is a process that has been described as a “race to the bottom” (Grossman and Krueger 1991, Xing and Kolstad 1998). Keller and Levinson (2002) posited that a key factor influencing a foreign firm’s choice of location could be the compliance costs of local environmental regulations
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
