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Does Environmental Governance Matter for Foreign Direct Investment? Testing the Pollution Haven Hypothesis for Indian States

Vinish Kathuria
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Vinish Kathuria: Shailesh J. Mehta School of Management, Indian Institute of Technology, Mumbai, India. Author email:

Asian Development Review, 2018, vol. 35, issue 1, 81-107

Abstract: This paper attempts to examine the role of environmental governance on foreign direct investment by testing the pollution haven hypothesis for 21 Indian states for the period 2002–2010. To test for the hypothesis, this study computes an abatement expenditure index adjusted for industrial composition at the state level using Annual Survey of Industries plant-level data. The methodology used is based on that proposed by Levinson (2001). The index compares actual pollution abatement expenditures in a particular state, unadjusted for industrial composition, to predicted abatement expenditures in the same state. (The predictions are based on nationwide abatement expenditures by industry and each state's industrial composition.) If the adjusted index is low for a state, it implies that the state has poor environmental governance, which would be expected to induce foreign firms to invest. However, the results do not find any evidence of the pollution haven hypothesis in the Indian context. Other infrastructure and market-access-related variables are more important in influencing a foreign firm's investment decisions than environmental stringency.

Keywords: abatement expenditure; environmental governance; India; pollution haven hypothesis (search for similar items in EconPapers)
JEL-codes: F18 F23 (search for similar items in EconPapers)
Date: 2018
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