Most academic research poured cold water on the notion of so-called pollution havens. At least four academic papers published in the past five years, using statistics for China, Mexico, Côte d’Ivoire, Venezuela, Morocco and other developing countries, failed to find strong evidence of a pollution haven effect.
Recent research suggests that the hypothesised relationship between lax environment regulation and FDI, is demonstrable. “Our results suggest that environmental considerations matter for firms’ location decisions,” said Andreas Waldkirch and Munisamy Gopinath of Oregon State University, in a paper published last year. Although their research details many determinants of FDI levels in Mexico, it also connects the upsurge in FDI flows over the past decade with pollution. “Examining several different pollutants, we find a positive correlation between FDI and pollution that is statistically and economically significant.”
This conclusion is not surprising: countries in the earlier stages of industrial development tend to attract investment from industries with higher levels of pollution. Against this argument is the fact that, when multinational companies invest, they tend to upgrade to state-of-the-art facilities, thus reducing pollution levels.
Another academic study entitled Unmasking the Pollution Haven Effect, published by the National Bureau of Economic Research (NBER), also links higher environmental standards with growing levels of offshore investment. The NBER studied US regulations and trade flows between the US, Canada and Mexico from 1977 to 1986. “Our results indicate that industries whose abatement costs increased most, experienced the largest increases in net imports. For the 20 industries hardest hit by regulation, the change in net imports amounts to more than half of the total increase in trade volume over the period.”
The stringency of environmental standards may not be the sole factor that determines which countries are successful in attracting FDI – but it is still a factor.