The effect of environmental regulation on the environmental footprint of foreign direct investment

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This studies analyses the effect of environmental regulation on the environmental footprint of inward FDI in the host country due to the investment decisions of foreign firms. In this study a broad range of countries from varied regions in the world are analysed in the period 2009-2016. Based on a thorough literature review, a theoretical model is proposed which serves as a basis of an estimation using panel data techniques. The study also entails a specific analysis of the energy sector in which the effect of environmental policy on inward FDI in green and brown energy is studied. The hypotheses posed in this studied stating that more stringent environmental regulation would decrease the environmental footprint of FDI by repelling polluting firms and attracting clean firms had to be rejected. This indicates that environmental regulation has an insignificant influence on the investment decisions of firm. This might suggest that foreign firms are not likely to move away from a country that implements more stringent environmental regulations and therefore will abide by the new regulations. Which could cause the environmental footprint to decrease via this mechanism, therefore this might be seen as an incentive to implement more stringent environmental regulations.
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