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Is There a Pollution Haven Effect? Evidence from a Natural Experiment in China

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Listed:
  • Lu, Yi
  • Wu, Mingqin
  • Yu, Linhui

Abstract

In this paper, we investigate whether there is a pollution haven effect, specifically, the effect of environmental regulations on firm location. Our identification uses the Two Control Zones (TCZ) policy implemented by the Chinese government in 1998. The difference-in-differences (DID) estimation shows that cities with tougher environmental regulations attract less foreign direct investment (FDI). Specifically, being listed as a TCZ city causes the amount of FDI to drop by 41%. Our results are robust to various robustness checks on the validity of the DID estimation and other estimation concerns.

Suggested Citation

  • Lu, Yi & Wu, Mingqin & Yu, Linhui, 2012. "Is There a Pollution Haven Effect? Evidence from a Natural Experiment in China," MPRA Paper 38787, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:38787
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    References listed on IDEAS

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    1. List, John A. & Co, Catherine Y., 2000. "The Effects of Environmental Regulations on Foreign Direct Investment," Journal of Environmental Economics and Management, Elsevier, vol. 40(1), pages 1-20, July.
    2. Judith M. Dean & Mary E. Lovely & Hua Wang, 2017. "Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China," World Scientific Book Chapters, in: Mary E Lovely (ed.), International Economic Integration and Domestic Performance, chapter 9, pages 155-167, World Scientific Publishing Co. Pte. Ltd..
    3. Henderson, J Vernon, 1996. "Effects of Air Quality Regulation," American Economic Review, American Economic Association, vol. 86(4), pages 789-813, September.
    4. Daniel L. Millimet & Jayjit Roy, 2011. "Three New Empirical Tests of the Pollution Haven Hypothesis When Environmental Regulation is Endogenous," Working Papers 11-10, Department of Economics, Appalachian State University.
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    6. Wolfgang Keller & Arik Levinson, 2002. "Pollution Abatement Costs and Foreign Direct Investment Inflows to U.S. States," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 691-703, November.
    7. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    8. Laura Hering & Sandra Poncet, 2011. "Environmental policy and trade performance: Evidence from China," Working Papers 2011-30, CEPII research center.
    9. Eskeland, Gunnar S. & Harrison, Ann E., 2003. "Moving to greener pastures? Multinationals and the pollution haven hypothesis," Journal of Development Economics, Elsevier, vol. 70(1), pages 1-23, February.
    10. Kellenberg, Derek K., 2009. "An empirical investigation of the pollution haven effect with strategic environment and trade policy," Journal of International Economics, Elsevier, vol. 78(2), pages 242-255, July.
    11. Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April.
    12. John A. List & Daniel L. Millimet & Per G. Fredriksson & W. Warren McHone, 2003. "Effects of Environmental Regulations on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 944-952, November.
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    Cited by:

    1. Chen, Qiu & Maung, Min & Shi, Yulin & Wilson, Craig, 2014. "Foreign direct investment concessions and environmental levies in China," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 241-250.
    2. Xie, Rui & Zhang, Jiahuan & Tang, Chuan, 2023. "Political connection and water pollution: New evidence from Chinese listed firms," Resource and Energy Economics, Elsevier, vol. 74(C).
    3. Pinyi Su & Muhammad Imran & Muhammad Nadeem & Shamsheer ul Haq, 2023. "The Role of Environmental Law in Farmers’ Environment-Protecting Intentions and Behavior Based on Their Legal Cognition: A Case Study of Jiangxi Province, China," Sustainability, MDPI, vol. 15(11), pages 1-22, May.
    4. Cavalletti, Barbara & Borino, Floriana, 2015. "The Challenge of Analysing the Impact of Environmental Policy on Competitiveness - L’analisi dell’impatto della politica ambientale sulla competitività: una sfida ancora aperta," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 68(2), pages 153-171.
    5. Qian Wang & Zhuoya Du & Boyu Wang & Yung‐ho Chiu & Tzu‐Han Chang, 2022. "Environmental regulation and foreign direct investment attractiveness: Evidence from China provinces," Review of Development Economics, Wiley Blackwell, vol. 26(2), pages 899-917, May.
    6. Hering, Laura & Poncet, Sandra, 2014. "Environmental policy and exports: Evidence from Chinese cities," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 296-318.
    7. Liu, Yongzheng & Zhang, Xiaoge, 2023. "Environmental regulation, political incentives, and mortality in China," European Journal of Political Economy, Elsevier, vol. 78(C).
    8. Yusen Gao & Changsheng Hu & Yue Yang, 2022. "Will tougher environmental policy reduce the employment of industrial enterprises? The heterogeneity analysis based on enterprise level and city level," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1810-1834, September.
    9. Boen Zhu & Yujie Zhou, 2024. "Environmental Regulations and Urban Technological Innovation: China’s Two Control Zones Policy as Evidence," Sustainability, MDPI, vol. 16(10), pages 1-14, May.

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    More about this item

    Keywords

    Pollution haven effect; Difference-in-differences estimation; Two control zones; Natural experiment;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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