INDUSTRY AGGLOMERATION, ENVIRONMENTAL REGULATION AND THE "POLLUTION HAVENS" HYPOTHESIS

Do pollution-intensive industries relocate to countries with laxer environmental standards through FDI, turning them into "pollution havens"? Empirical studies to date show little evidence to support this hypothesis, which may suffer potentially from omitted variable bias and measurement errors. Deriving a location choice equation we estimate conditional logit models using pooled times and cross-section data from 1990 to 2004 to examine the pollution-haven behavior of FDI in China. The regression results show that FDI flows in China from three groups of source countries go into provinces with industry agglomeration effects and local investment incentives, relatively developed local market and abundant stocks of unskilled labor, and less state ownership. Environmental regulation stringency does influence location choice of FDI flows in China, but not as significantly as expected. The pollution levy of host provinces is a significant restraint for FDI inflows in three groups, despite to different extent. Pollution-intensive industries have certain but not notable attraction to the investors from industrial countries, while are obviously attractive to Asian investors.