Do Stringent Environmental Regulations Attract Foreign Direct Investment in Developing Countries? Evidence on the "Race to the Top" from Cross-Country Panel Data

Abstract

It is widely believed that environmental regulations in a developing country increase abatement costs for firms and, in turn, make the country a less attractive investment avenue for multinational firms from advanced economies. Using panel data of 120 developing countries from 2000 to 2014, this study empirically investigates whether stringent environmental regulations deter foreign direct investment (FDI) in developing countries. The empirical results are the exact opposite of the pollution haven effect, namely, stringent environmental regulations significantly attract FDI, a circumstance that causes a race to the top. The results are robust when tested against various specifications.