Strategic Environmental Standards and Plant Location

Abstract

Horst Siebert’s concept of locational competition is a broad concept combining competition between firms on the world product market, competition of immobile factors of production (e.g. labor) in a country for mobile factors of production of the world (e.g. capital), and competition by governments for attracting mobile capital and mobile technolocigal knowledge.1 “The issue is to what extent countries are able to keep mobile factors of production at home or whether they can attract mobile factors of production from abroad” (Siebert, 1999, p. 243). In his view a country with heavy regulation will suffer from its politics. In this paper I will concentrate on environmental regulation as an instrument of locational competition. On the one hand, a strict environmental regulation will reduce the damage caused by pollution, but on the other hand it might induce mobile factors to leave the country because economic conditions become less favorable. The argument is that stringent environmental standards cause high costs of production, leading to a decline in competitiveness, and ultimately in market share, jobs and investments. In countries with persistently high unemployment, threats of job losses and of plant relocation can be very powerful and helpful for opponents of a strict environmental policy.2 However, a broad consensus has emerged in the empirical literature that regulatory differences (with some exceptions) have, at best, a negligible impact on industrial location. Studies attempting to measure the effect of environmental regulation on net exports, overall trade flows, and plantlocation decisions have produced estimates that are either small or statistically insignificant. These results emerged from studies by (1995) and (1997) which review the empirical evidence.