Environmental Regulations and FDI Inflows to U.S. States

This paper estimates the extent to which stringent environmental standards in some U.S. states have deterred foreign direct investment (FDI). It addresses three shortcomings in the existing literature on the economic effects of environmental regulations. First, it avoids comparing regulations in different countries by using data on the regulatory stringency of U.S. states, and examining whether there is relatively more FDI to less stringent states. Second, it uses use an index of relative compliance costs that accounts for states' different industrial compositions. Third, it uses a panel of annual measures of relative regulatory stringency from 1977 to 1994. We examine two types of FDI data: BEA data on gross property, plant and equipment investment at foreign-owned manufacturing facilities; and ITA data on planned new factory expenditures by foreign-owned firms. We find some evidence of small deterrent effects of environmental regulations on particularly pollution-intensive industries, but little evidence of large or widespread effects. While the broad conclusions are consistent with the existing literature, this paper does address three important concerns with that literature.