Beyond the Pollution Haven: Reassessing Environmental Policy Stringency and FDI Dynamics

Abstract

We explore the complex interplay between the stringency of environmental policy with Foreign Direct Investment (FDI) in reference to two theoretical frameworks: Pollution Haven Hypothesis (PHH) and Porter’s Hypothesis. Focusing on how three subcategories of environmental policies – market-based, non-market-based, and technology support policies – influence FDI decisions, our research contributes to examine the understanding of the dynamics at play for the academics and policymakers. The study provides empirical evidence for the arguments using a panel data of 40 countries over a decade (2010–2020). Our findings reveal that the stringency of aggregate environmental policy, along with non-market-based and technology support policies, exhibit an affirmative and significant correlation with FDI. Interestingly, there is no clear relationship between policies that are market-based and those of FDI positions, this suggests that strict market-based policies do not deter FDI into host countries. The findings contribute to the ongoing discourse on environmental regulation and international investment, suggesting that stringent environmental policies – depending on their type – can be compatible with or even facilitate FDI attraction.