Strategic environmental policies in the presence of foreign direct investment

Kayalica M. Ö., Lahiri S.

ENVIRONMENTAL & RESOURCE ECONOMICS, vol.30, no.1, pp.1-21, 2005 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 30 Issue: 1
  • Publication Date: 2005
  • Doi Number: 10.1007/s10640-004-0757-3
  • Journal Name: ENVIRONMENTAL & RESOURCE ECONOMICS
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.1-21
  • Keywords: environment, emission permits, foreign direct investment, trade, pollution, CROSS-BORDER POLLUTION, UNITED-STATES, LOCATION DECISIONS, EXPORT SUBSIDIES, PLANT LOCATION, REGULATIONS, TARIFFS, TRADE
  • Istanbul Technical University Affiliated: Yes

Abstract

We analyze strategic environmental standards in the presence of foreign direct investment. A number of foreign firms located in a host country compete with a domestic firm in another country to export a homogeneous good to a third country. When the number of foreign firms is exogenous, the host country applies a stricter environmental regulation than the other producing country. However, under free entry and exit of foreign firms, the host country may apply a less severe standard under both non-cooperative and cooperative equilibrium. We also find that the nature market structure does not affect the equilibrium values of total pollution if export subsidies are also used.