Environmental Regulations, Outward FDI and Heterogeneous Firms: Are Countries Used as Pollution Havens?

We consider whether environmental regulations influence FDI outflows from a country with stringent environmental policy. We consider this issue by incorporating the predictions from the recent heterogeneous firm models of international trade into an empirical model of outward FDI by UK firms. We find that environmental regulations are not a robustly significant determinant of the internationalisation decision. In addition, we do not find robust evidence to suggest that dirtier MNEs are more likely to locate in host countries with lax environmental policy than cleaner MNEs. However, we do uncover systematic differences in the FDI behaviour of high and low environmental cost firms in other respects. © 2011 Springer Science+Business Media B.V.