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Does Environmental Governance Matter for Foreign Direct Investment? Testing the Pollution Haven Hypothesis for Indian States

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  • Vinish Kathuria

    (Shailesh J. Mehta School of Management, Indian Institute of Technology, Mumbai, India. Author email: vinish.kathuria@gmail.com)

Abstract

This paper attempts to examine the role of environmental governance on foreign direct investment by testing the pollution haven hypothesis for 21 Indian states for the period 2002–2010. To test for the hypothesis, this study computes an abatement expenditure index adjusted for industrial composition at the state level using Annual Survey of Industries plant-level data. The methodology used is based on that proposed by Levinson (2001). The index compares actual pollution abatement expenditures in a particular state, unadjusted for industrial composition, to predicted abatement expenditures in the same state. (The predictions are based on nationwide abatement expenditures by industry and each state's industrial composition.) If the adjusted index is low for a state, it implies that the state has poor environmental governance, which would be expected to induce foreign firms to invest. However, the results do not find any evidence of the pollution haven hypothesis in the Indian context. Other infrastructure and market-access-related variables are more important in influencing a foreign firm's investment decisions than environmental stringency.

Suggested Citation

  • Vinish Kathuria, 2018. "Does Environmental Governance Matter for Foreign Direct Investment? Testing the Pollution Haven Hypothesis for Indian States," Asian Development Review, MIT Press, vol. 35(1), pages 81-107, March.
    • Handle: RePEc:tpr:adbadr:v:35:y:2018:i:1:p:81-107
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    abatement expenditure; environmental governance; India; pollution haven hypothesis;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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