No Marshmallows, Just Term Papers
International Trade Flows in particular Foreign Direct Investment
(FDI) depend on numerous factors such as socio- or political stability,
environmental standards which must be met, imposed taxes or
labor conditions. Measuring these effects is not as straight forward as
it might seem and various studies have been conducted in this field.
The following paper focuses on the pollution haven hypothesis stating
that lax environmental regulations increase Foreign Direct Investment
inflow since investing firms experience significant cost efficiencies and
The data set is mainly chosen from the World Data Bank and eleven
explanatory variables and one instrument variable are used to investigate
their influence on FDI inflow (as percentage of GDP). The variables
can be grouped intro three parts starting with country characteristics,
then environmental standards and finally controlling for several
factors expressing governmental quality and standards. The empirical
analysis will start with some simpler models only investigating the influence
of environmental regulation on FDI and later on the model is
expanded by included several governmental variables to improve the
quality of the empirical results.
During the empirical analysis a pivotal factor will be the OECD membership
even if several environmental standards as well as governmental
standards are controlled. Assuming that OECD member countries
do have tighter environmental regulation which according to the pollution
haven hypothesis lead to less FDI inflow, a significant empirical
difference in FDI inflow between OECD members and non-members
would be a qualified result supporting the pollution haven hypothesis.
In this paper we expect to see some significant determinants of
Foreign Direct Investment inflow in order to either agree or reject the
pollution haven hypothesis.
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