Strict environmental policy: An incentive for FDI

Bouwe Dijkstra, Anuj Mathew and Arijit Mukherjeea ()
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Arijit Mukherjeea: University of Nottingham

No 08/11, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: Empirical evidence has so far failed to confirm that lenient environmental regulation attracts investment from polluting firms. We show that a firm may want to relocate to a country with stricter environmental regulation, when the move raises its rival's cost by sufficiently more than its own. We model a Cournot duopoly with a foreign and an incumbent domestic firm. When the foreign firm moves to the home country, the domestic government will respond by increasing the environmental tax rate. This may hurt the domestic firm more than the foreign firm. The home (foreign) country's welfare is (usually) lower with FDI.

Keywords: Trade and Environment; Foreign Direct Investment; Emission tax- ation (search for similar items in EconPapers)
JEL-codes: F12 F18 F21 Q50 Q58 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-03-01
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