To shut down or to shift: Multinationals and environmental regulation

•Using data on 28 OECD countries the study finds that both host and home country environmental regulations are important determinants of foreign direct investment (FDI).•In a simple framework the study outlines the effects of environmental regulation on FDI.•Host country environmental regulations decrease FDI.•Home environmental regulation increases FDI at low levels of regulation and decreases FDI at high levels of regulation.

According to the pollution haven effect mobile capital responds to environmental regulation by moving from countries with high regulation to countries with low regulation. Previous tests of the pollution haven effect focus on host country regulation effect. This study also examines the effect of home country regulation on foreign direct investment (FDI). Using a panel of 28 OECD countries for 1990-2000 to estimate host and home country environmental regulations' effect on FDI, this study finds that host regulation decreases FDI. In contrast, home environmental regulation increases FDI at low levels of home regulation and decreases FDI at high levels of home regulation.