Environmental regulation and French firms location abroad: An economic geography model in an international comparative study

In this study, we re-examine the pollution haven hypothesis by a fresh take on both its theoretical and empirical aspects. The originality of our work is twofold. First, we apply an economic geography model with the aim of deriving a rigorous specification for the impact of environmental regulation on firms' location choice. Second, we test a conditional logit model using French firm-level data in an international comparative study. We confirm evidence of a strong pollution haven effect for our pooled sample of countries receiving French direct investments. However, through a sensitivity analysis, we validate this finding for developed countries and most of emerging economies and Central and Eastern European countries, but not for most countries of the Commonwealth of Independent States and developing countries, where a more stringent environmental regulation seems to attract investments. Furthermore, we highlight a forward looking behavior of firms, in terms of their location decision-making.

► We revisit the pollution haven hypothesis by developing an economic geography model. ► We test it through a conditional logit model using French firm-level data. ► We find a pollution haven effect for Developed, Emerging and CEE countries. ► In contrast, stringent regulation attracts FDI in CIS and Developing countries. ► Findings show a forward looking behavior of firms while deciding to locate abroad.