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The Effect of Environmental Regulations on Foreign Direct Investment

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The effect of Environmental Regulations on Foreign Direct Investment
Florian Gasser Regina Hammerschmid Lydia Sperrer

Projektarbeit Volkswirtschaftliche Analysemethoden Universität Innsbruck Eingereicht am: 25. Juni 2011 bei Ass.-Prof. Mag. Dr. Herbert Stocker

Abstract International Trade Flows in particular Foreign Direct Investment (FDI) depend on numerous factors such socio- or political stability, environmental standards which must be met, imposed taxes or labour 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 hypotheses stating that lax environmental regulations increase Foreign Direct Investment inflow since investing firms experience significant cost efficiencies and comparative advantages. The data set is mainly chosen from the World Data Bank and five explanatory variables are used to investigate their influence on FDI inflow (as percentage of GDP). During the empirical analysis a pivotal factor will be the OECD membership even if several environmental standards are controlled. We expect to see some significant determinants of FDI inflow in order to either agree or reject the pollution haven hypotheses.

1 Introduction 2 The Two Hypotheses 3 Data Set 4 Econometric Model and Results 4.1 Linear Regression Model (OLS) . . . . . . . . . . . . . . . . . 4.2 Assumptions of Gauss-Markov-Theorem . . . . . . . . . . . . 4.3 Chow Test for Structural Break . . . . . . . . . . . . . . . . . 5 Conclusion A Appendix A.1 Program Code EViews . . . . . . . . . . . . . . . . . . . . . . 1 1 1 2 3 4 6 7 9 9



International trade theory is based on the concept of comparative advantages which is consistent with what we could observe in the booming globalization process during the last decades. A multinational firm...

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