Thesis Public Defense | VNP25 Đặng Vũ Thanh

Does the feedback effect from foreign investment to environmental regulation matter?

Student: Đặng Vũ Thanh, VNP 25

Supervisor: Dr. Đức Võ

Abstract:

Foreign investment and environmental regulations are generally considered a two-way relationship. The effect of environmental regulation to foreign investment has been intensively examined in previous empirical studies.  However, the reverse relationship has largely been ignored. As such, this study is conducted to examined the feedback effects from foreign investment on environmental regulations under the influence of host countries’ political institutions for 26 OECD countries during the period 1990-2015. The study makes contributions to the literature in three dimensions. First, this is one of the few studies examining the reverse relationship in the Pollution haven hypothesis. Second, we use OECD’s newly-developed environmental policy stringency index, which is believed to be a more comprehensive measure for environmental regulations than previous ones. Third, we investigate the long-run relationship between foreign investment and environmental regulation, which has largely been neglected in the literature.  Empirical results from this study are consistent with the firm lobby model, indicating that foreign investment does exert negative influence on environment policies because of the lobbying effect. However, if the number of legislative units is large enough, the lobbying effect is negated and the governments are likely to impose stricter pollution tax to maximize social welfare. Analyzing the sub-samples, the effects do not translate to the upper-income countries, where FDI is found to improve environmental regulations. Results for the lower-income countries are consistent with the full sample.

Keyword: Foreign investment, Environmental regulation, Pollution haven hypothesis, Institution, OECD

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