Free Article Review On Environmental Regulation And Foreign Direct Investment: Evidence From South Korea

Introduction

The paper investigates how environmental regulation affects foreign direct investment. (A foreign direct investment is an investment made by a company based in one country into a company based in another country. This can be done in a number of ways. For example, the investing company can set up a subsidiary or associate company in the foreign country, or it can acquire shares of the investee company.) Heavily polluting industries will tend to invest in countries that have less stringent environmental regulations. This is known as the pollution haven effect. Since regulations raise the costs of production for pollution-intensive goods, there is a comparative advantage to relocating production systems to countries with relaxed environmental standards.
The study examines the pattern of foreign direct investment outflows from South Korea to fifty foreign countries in 121 industries from 2000 to 2007. It employs a differences-in-differences (DID) identification strategy to deal with potential confounders. DID is a statistical technique that calculates the effect of a variable on an outcome by measuring the difference in the differences between the treatment and control groups over time. The approach enabled researchers to distinguish environmental laxity from other determinants of comparative advantage. The pollution haven effect was evaluated at both intensive and extensive margins. In economics, intensive margin refers to the degree to which a resource is utilized, whereas extensive margin refers to the extent to which it is utilized. For example, intensive margin could be how hard an employee works, while extensive margin could be the number of hours worked.

Methodology

The researchers developed an empirical model comprising two distinct fundamental motivations in FDI.