This paper aims to test the pollution haven hypothesis (PHH) in developing Asian countries by examining whether lax environmental laws are a determinant of foreign direct investment (FDI) inflows into these countries, which are characterised by being the largest FDI recipients among developing countries and also by being among the most highly polluted and the highest carbon dioxide (CO2) emitters worldwide.
Panel data for the main determinants of FDI inflows including a carbon dioxide emissions and an agglomeration variable are collected for all developing Asian countries for the 1996-2016 period and a fixed effects model with robust standard errors is used.
Results show that lax environmental laws are a significant determinant of FDI inflows for the selected Asian countries as a whole. A closer look shows that this result cannot be generalised for the whole region, but applies particularly to three countries China, Hong Kong and the Philippines. PHH is thus only partially supported.
FDI is a main engine of growth for developing countries. However, it might adversely affect them, specifically in terms of environmental deterioration in the absence of stringent and well-enforced environmental policies. Some developing countries might even deliberately relax their environmental policies to attain comparative advantage especially in polluting industries and thus attract FDI. This leads to serious repercussions and might eventually limit growth, where augmenting it was the intention in the first place.
