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The impacts of energy prices on industrial foreign investment location: evidence from global firm level data

Aurélien Saussay () and Misato Sato ()
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Aurélien Saussay: CIRED & OFCE, Sciences Po, Paris

No 2018.21, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: This paper analyzes the role of energy prices in firms’ investment location decisions in the manufacturing sector. Building on the application of discrete choice theory to the firm location problem, we specify a conditional logit model linking bilateral foreign direct investment (FDI activity to relative energy prices. We then empirically test this link using a global dataset of M&A deals in the manufacturing sector covering 41 countries between 1995 and 2014, using econometric techniques adapted from the estimation of gravity models. The results suggest that upon deciding to invest, firms are attracted to regions that have lower energy prices. However, counterfactual simulations reveal that unilateral implementation of a $50/tCO2 carbon tax by various coalitions of countries is expected to have limited negative impact on the attractiveness of economies to foreign industrial investments. Hence, our results support the pollution haven effect, but find the magnitude is limited and could be addressed with targeted measures in the most energy intensive sectors.

Keywords: FDI; Mergers and Acquisitions; energy prices; firm location; competitiveness impacts; carbon leakage (search for similar items in EconPapers)
JEL-codes: F21 F64 H23 Q52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-int and nep-reg
Date: 2018-12
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