Does FDI influence environmental regulations?

In a historical period in which the environmental consciousness is finally becoming a day-to-day topic, it is interesting to understand how countries can measure the effectiveness and the stringency of their decisions in terms of regulations. Observing the enormous flow of capital going into less controlled countries, researchers have interrogated themselves trying to find connections between economic instruments as the Foreign Direct Investments (FDI), the environmental regulatory stringency, and the corruptibility of a certain host country. Among the numerous contributions brought by the literature, we decided to replicate the approach conducted by Cole et al. in the paper “Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?”. Taking this as a starting point, to emulate the research we decided to update the dataset used by exploiting the FDI Market Database. This database helped us to cluster the investments according to the activity type, and hence it gave us some interesting insight. This thesis will briefly present the theories behind FDIs, why they are undertaken and what are the consequences both on the investor and on the destination country of using such instruments. Then, it is reported the main contributions about the Environmental Stringency: what it is, how it can be measured and why it is so difficult to be measured. After having analyzed this peculiar index, we propose some approaches used by researchers and comment their strengths and potential issues. To close the chapter we will highlight again what are the externalities related to environmental policies and why they are necessary to regulate the market. Moreover, we will show an interesting mathematical model that can predict the results of the econometric analysis proposed by Cole et al. Finally, we reported our data analysis and comment the results obtained both by time effects regression and through the instrumental variables (IV) approach.