Environmental standards as a strategy of international technology transfer

Political scientists have shown that regulations diffuse from importing nations to exporting nations through international trade channels. However, this exporter-importer logic cannot explain why some key developing countries, such as China, have adopted automobile emission standards despite their local manufacturers' inability to compete in international markets. We develop a theory of environmental regulations as a strategy of international technology transfer. We argue that developing countries benefit from adopting environmental regulations if they enjoy substantial foreign direct investment (FDI) inflows in the concerned economic sectors and hold promise as automobile markets for foreign producers with access to advanced technology. In these circumstances, developing countries can use environmental regulations to force foreign producers to supply new technologies. We support the theory with a quantitative analysis of new data on the relationship between automobile FDI and developing countries' adoption of emission standards. We find that automobile FDI has a strong positive effect on the probability of adoption.