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Environmental regulation and foreign direct investments: evidence from a new measure of environmental stringency

Published online by Cambridge University Press:  29 August 2025

Raphaël Chiappini  and
Enea Gerard
Raphaël Chiappini*
Affiliation:
Univ. Bordeaux, CNRS, INRAE, BSE, UMR 6060, UMR 1441, F-33600 Pessac, France
Enea Gerard
Affiliation:
Univ. Bordeaux, CNRS, INRAE, BSE, UMR 6060, UMR 1441, F-33600 Pessac, France
*
Corresponding author: Raphaël Chiappini; raphael.chiappini@u-bordeaux.fr
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Abstract

This paper investigates the impact of environmental regulations on inward foreign direct investment (FDI) using a novel index that distinguishes between the implementation and enforcement of environmental policy across 111 countries from 2001 to 2018. Leveraging bilateral FDI data and a structural gravity model, we find robust evidence of a Pollution Haven Effect: weaker environmental regulations in host countries are associated with higher levels of inward FDI. The effect is more pronounced in emerging markets and in environments with higher corruption. Importantly, we show that FDI responds more strongly to policy implementation, capturing formal regulatory commitment, than to enforcement, measured as deviations between predicted and actual emissions. In addition, bilateral FDI patterns are shaped by the environmental stringency gap between source and host countries, consistent with regulatory arbitrage behavior.

Keywords

environmental regulationforeign direct investmentpollution haven hypothesisF21Q58

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Articles
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Macroeconomic Dynamics , Volume 29 , 2025 , e136
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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