Environmental Regulation and Foreign Direct Investments: Evidence from a new measure of environmental stringency

Raphaël Chiappini () and Enea Gerard ()
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Raphaël Chiappini: University of Bordeaux
Enea Gerard: University of Bordeaux

No 2025.9, Working Papers from International Network for Economic Research - INFER

Abstract: This paper investigates the impact of environmental regulations on inward foreign direct investment (FDI) using a novel index that distinguishes between the implementation and enforcement of environmental policy across 111 countries from 2001 to 2018. Leveraging bi- lateral FDI data and a structural gravity model, we find robust evidence of a Pollution Haven Effect: stricter environmental regulations in host countries are associated with lower inward FDI. The effect is more pronounced in emerging markets and in environments with higher corruption. Importantly, we show that FDI responds more strongly to policy implementation, capturing formal regulatory commitment, than to enforcement, measured as deviations be- tween predicted and actual emissions. In addition, bilateral FDI patterns are shaped by the environmental stringency gap between source and host countries, consistent with regulatory arbitrage behavior.

Keywords: Environmental regulation; foreign direct investment; Pollution Haven Hypothesis (search for similar items in EconPapers)
JEL-codes: F Q (search for similar items in EconPapers)
Pages: 49 pages
Date: 2025
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