Environmental policy stringency and foreign direct investment : testing the pollution haven hypothesis with a new composite index

Sammanfattning: Environmental concerns and increasing stringency levels of environmental regulations, especially in developed countries, has given rise to the debate concerning pollution havens. The pollution haven hypothesis argues that differences in environmental policy stringency will give economic incentives to firms and industries to move their production to countries with more lenient environmental regulations. Even though there exists a vast strand of literature investigating this phenomena, their results are inconclusive. This thesis empirically studies weather difference in environmental policy stringency has a positive effect on foreign direct investment flows between the European OECD and BRIICS countries over the time-period 2003 to 2012. Using a fixed effect model, FDI is determined by the commonly used knowledge capital specification introduced by Markusen and Maskus (2002) in addition to the main independent variable proxied by a new indicator for environmental policy stringency. The results of this study shows a significant but weak support for the pollution haven hypothesis when considering a time-lag of the EPS-variable by one year.