Foreign Direct Investment and Environmental Taxes

Roberto De Santis () and Frank Stähler

No 1013, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper discusses environmental policies in response to foreign direct investment (FDI) in a symmetrie two-country setting, where firms' behavior affects government policy decisions. We show that two alternative equilibria with FDI are possible: (i) one with unilateral FDI, where one firm is a multinational firm, and the other firm is a national firm; (ii) and one with bilateral FDI, where both firms become multinational firms. With regard to strategic environmental policies, we show that the country attracting FDI introduces a Pigouvian environmental tax, whereas the country served by the local firm only levies a smaller tax rate. Hence, FDI does not lead to ecological dumping. With regard to welfare, we show that the impact on welfare is negative for the country hosting the national firm; positive for the country hosting the multinational firm, if FDI is unilateral; and ambiguous, for both countries, if FDI is bilateral.

Keywords: Foreign direct investment; environmental taxes; multinational enterprises; plant location (search for similar items in EconPapers)
JEL-codes: F12 F18 F23 Q20 (search for similar items in EconPapers)
Date: 2000
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https://www.econstor.eu/bitstream/10419/17712/1/kap1013.pdf (application/pdf)

Related works:
Journal Article: Foreign Direct Investment and Environmental Taxes (2009)
Journal Article: Foreign Direct Investment and Environmental Taxes (2009)
Working Paper: Foreign direct investment and environmental taxes (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1013

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