Pollution Haven or Hythe? New Evidence from Mexico

Andreas Waldkirch () and Munisamy Gopinath
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Munisamy Gopinath: Oregon State University

International Trade from EconWPA

Abstract: Foreign direct investment (FDI) flows into developing countries have been increasing dramatically over the past decade. At the same time, there has been widespread concern that lax environmental standards are in part responsible for this surge. This paper revisits the pollution haven hypothesis by examining to what extent the pollution intensity of production helps explain FDI in Mexico. By focusing on pollution intensities, which are directly related to emission regulations, we avoid the problem of unobservable pollution taxes and allow for substitution between capital and pollution. Examining several different pollutants, we find a positive correlation between FDI and pollution that is both statistically and economically significant in the case of the highly regulated sulfur dioxide emissions. Industries for which the estimated relationship between FDI and pollution is positive receive as much as 40 percent of total FDI and account for as much as 30 percent of manufacturing output. Although our results suggest that environmental considerations matter for firms' location decisions, FDI locates in Mexico also in accordance with its comparative advantage in labor- intensive production processes, consistent with the previous literature.

Keywords: Foreign Direct Investment; Pollution Haven; Mexico (search for similar items in EconPapers)
JEL-codes: F21 F23 Q38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env
Date: Written 2004-12-07
Note: Type of Document - pdf; pages: 34. pdf-file, 34 pages
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