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Environmental regulation and foreign direct investment: Evidence from South Korea

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  • Chung, Sunghoon
Abstract
This paper studies how environmental regulation shapes the pattern of foreign direct investment (FDI), and thereby assesses the pollution haven hypothesis. Conflicting results exist in the case studies examining the most advanced countries, partly due to the deterrent effect of clean technology adoptions on industry migration. To minimize the clean technology effect, we examine the pattern of South Korean FDI over 2000–2007, the period that Korean firms relied on old production technologies despite facing rapidly strengthened environmental standards. A difference-in-differences type identification strategy circumvents other potential confounders. We find strong evidence that polluting industries tend to invest more in countries with laxer environmental regulations in terms of both the amount of investment (intensive margin) and the number of new foreign affiliates (extensive margin). A similar finding is obtained when imports are analyzed.

Suggested Citation

  • Chung, Sunghoon, 2014. "Environmental regulation and foreign direct investment: Evidence from South Korea," Journal of Development Economics, Elsevier, vol. 108(C), pages 222-236.
    • Handle: RePEc:eee:deveco:v:108:y:2014:i:c:p:222-236
    DOI: 10.1016/j.jdeveco.2014.01.003
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    More about this item

    Keywords

    Pollution haven hypothesis; Environmental regulation; Comparative advantage; Foreign direct investment; South Korea;
    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
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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