The impact of environmental policy stringency on FDI flows: Evidence from BRIICS-OECD flow panel dataset

Sammanfattning: The Paris Agreement has increased interest in environmental policy research, which has alerted that companies will relocate their investment to countries with less stringent environmental standards. This pollution haven effect, although theoretically analyzed, has wide-ranging empirical results which are highly dependent on the selected case and proxy for environmental policy stringency. Attempting to contribute to this debate, this research utilizes a comprehensive policy-based composite index to estimate the relationship between environmental policy stringency and FDI in an OECD-BRIICS panel dataset. Using a fixed-effects estimation, the results of this study show that a larger difference between origin and destination country in environmental policy stringency is associated with an increase in FDI, providing evidence for a pollution haven effect. Additionally, a time dimension of the analysis has also been found to be relevant when considering different time frames for the origin and destination country. Finally, when decomposing the indicator, it is found that market-based instruments of environmental policy have a stronger impact on FDI flow than non-market instruments.