Corruption, FDI, and Environmental Regulations

Abstract

Part II of this book reviewed previous literature on the pollution haven hypothesis. The results are mixed in that there is a not consistent finding on whether FDI is attracted by weak environmental regulations. A common limitation in these studies is that they only consider the impact of environmental regulations on FDI and none have considered the endogeneity of environmental regulations. In Chapter 8, we addressed the endogeneity of environmental regulations by making a one year lag for the three regulatory variables. In this chapter we re-consider the endogeneity of environmental stringency that may be influenced by both local government behaviour (for example corruption) and the level of FDI.