Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China
Partial funding for this research was provided by the World Bank. We would like to thank Xuepeng Liu for compiling the EJV data and Cory Davidson for research assistance. We have benefited from helpful suggestions regarding data and estimation from K.C. Fung, Meredith Crowley, Andrew Bernard, Keith Head, Jan Ondrich, John List, Stuart Rosenthal, and Scott Taylor. We are also grateful for comments from seminar participants at the 2004 NBER IT1 Summer Institute, 2004 American Economic Association meetings, 2003 Econometric Society Summer meetings, Fall 2003 Midwest International Economics meetings, 2003 Northeast Universities Development Conference, Williams College, Dartmouth College, University of Minnesota, Cornell University, University of Maryland, 2004 UC Santa Barbara UNCTEE Workshop, and the World Bank Trade Seminar.
At the center of the pollution haven debate is the claim that foreign investors from industrial countries are attracted to weak environment regulations in developing countries. Some recent location choice studies have found evidence of this attraction, but only for inward FDI in industrial countries. The few studies of inward FDI in developing countries have been hampered by weak measures of environmental stringency and by insufficient data to estimate variation in firm response by pollution intensity. This paper tests for pollution haven behavior by estimating the determinants of location choice for equity joint ventures (EJVs) in China. Beginning with a theoretical framework of firm production and abatement decisions, we derive and estimate a location choice model using data on a sample of EJV projects, Chinese effective levies on water pollution, and Chinese industrial pollution intensity. Results show EJVs in highly-polluting industries funded through Hong Kong, Macao, and Taiwan are attracted by weak environmental standards. In contrast, EJVs funded from non-ethnically Chinese sources are not significantly attracted by weak standards, regardless of the pollution intensity of the industry. These findings are consistent with pollution haven behavior, but not by investors from high income countries and only in industries that are highly polluting. Further investigation into differences in technology between industrial and developing country investors might shed new light on this debate.
