Searching for Pollution Havens

Abstract

This study takes a fresh look at the regulatory determinants of foreign direct investment (FDI) by asking whether the stringency and sustainability of environmental regulations affect FDI flows across 25 Western and Eastern European countries. Unlike the earlier literature, which considered only host country characteristics, this article focuses on the difference in the regulatory environments in home and host economies. The data suggest that more stringent environmental regulations in the investor's country relative to those in the potential host country are positively correlated with the probability of investment as well as with the volume of FDI. The results also show that firms in industries with higher abatement costs tend to invest more abroad.