The Mulitnational Corporation and the Environment: Testing The Pollution Haven Hypothesis

In a world of increasing foreign direct investment flows some concerns have been raised that differences in environmental stringency between nations will prompt multinational corporations to relocate production in those countries where standard and enforcement of environmental regulations are relatively lax. This paper aims to test the validity of such a notion which has been dubbed the pollution haven hypothesis. We do so by developing a model based on trade and foreign direct investment theories and testing it using a cross-country data set. The econometric analysis in our study finds no evidence to suggest that environmental regulation is a significant determinant of inward FDI.