The Impact of Environmental Regulation on Location’s Choice of Cross-Border Mergers and Acquisitions

  1. Carril-Caccia, Federico
  2. Milgran Baleix, Juliette
Journal:
Cuadernos económicos de ICE

ISSN: 0210-2633

Year of publication: 2020

Issue Title: GLOBALIZACIÓN Y SOSTENIBILIDAD

Issue: 100

Pages: 167-192

Type: Article

DOI: 10.32796/CICE.2020.100.7123 DIALNET GOOGLE SCHOLAR lock_openOpen access editor

More publications in: Cuadernos económicos de ICE

Abstract

This study contributes to the literature seeking to test the pollution haven’s hypothesis (PHH), by focusing on the influence of environmental policy on the location’s decision of cross-border Mergers and Acquisitions (M&As). To this end, we estimate a gravity model using an original bilateral database for the extensive margin of M&A among 34 developed and emerging countries during the period 1995-2015. Reached evidence confirms only part of the pessimist predictions. A more stringent environmental regulation would not boost outward M&As to the extent that it originates from countries with relatively good institutional quality. In contrast, in countries with relatively high level of corruption, the laxer the environmental regulation, the higher the number of inward M&As. However, reducing corruption can compensate the competitiveness losses associated with the compliance of a stricter environmental regulation

Bibliographic References

  • Adam, A., & Filippaios, F. (2007). Foreign direct investment and civil liberties: A new perspective. European Journal of Political Economy, 23(4), 1038-1052.
  • Anderson, J. E. & van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. American Economic Review, 93(1), 170-192.
  • Antras, P., & Yeaple, S. R. (2014). Multinational firms and the structure of international trade. In G. Gopinath, E. Helpman, & K. Rogoff (Eds.), Handbook of international economics (pp. 55–130). Elsevier.
  • Baier, S. L., & Bergstrand, J. H. (2009). Estimating the effects of free trade agreements on international trade flows using matching econometrics. Journal of International Economics, 77(1), 63-76.
  • Baumol, W. J., & Oates W. E. (1988). The Theory of Environmental Policy. Cambridge Univ. Press. 2nd ed.
  • Bergstrand, J. H., & Egger, P. (2013). What Determines BITs? Journal of International Economics, 90(1), 107-122.
  • Bialek, S., & Weichenrieder, A. J. (2015). Environmental Regulation and Foreign Direct Investment: The Role of Mode of Entry. CESifo DICE Report, 13(4), 41-47. ifo Institut Leibniz-Institut für Wirtschaftsforschung an der Universität München, München.
  • Botta, E., & Koźluk, T. (2014). Measuring Environmental Policy Stringency in OECD Countries: A Composite Index Approach (No. 1177). OECD Publishing. http://dx.doi. org/10.1787/5jxrjnc45gvg-en
  • Brucal, A., Javorcik, B., & Love, I. (2019). Good for the environment, good for business: Foreign acquisitions and energy intensity. Journal of International Economics, 121, 103247.
  • Candau, F., & Dienesch, E. (2017). Pollution haven and corruption paradise. Journal of Environmental Economics and Management, 85, 171-192.
  • Carril-Caccia, F., & Pavlova, E. (2018). Foreign direct investment and its drivers: a global and EU perspective. ECB Economic Bulletin, 4, pp. 60-78.
  • Carril-Caccia, F., & Pavlova, E. (2020). Mergers and acquisitions & trade: A global value chain analysis. The World Economy, 43(3), 586-614.
  • Chen, V. Z., Li, J., & Shapiro, D. M. (2015). Subnational institutions and outward FDI by Chinese firms: The mediating role of firm-specific advantages. Multinational Business Review, 23(4), 254-276.
  • Cheng, Z., Li, L., & Liu, J. (2018). The spatial correlation and interaction between environmental regulation and foreign direct investment. Journal of Regulatory Economics, 54(2), 124-146.
  • Cole, M. A., Elliott, R. J., & Zhang, L. (2017). Foreign direct investment and the environment. Annual Review of Environment and Resources, 42, 465-487.
  • Contractor, F. J., Dangol, R., Nuruzzaman, N., & Raghunath, S. (2020). How do country regulations and business environment impact foreign direct investment (FDI) inflows? International Business Review, 29(2). http://doi.org/10.1016/j.ibusrev.2019.101640
  • Cuadros, A., Martín-Montaner, J., & Paniagua, J. (2016). Homeward bound FDI: Are migrants a bridge over troubled finance? Economic Modelling, 58, 454-465.
  • Dam, L., & Scholtens, B. (2008). Environmental regulation and MNEs location: Does CSR matter? Ecological Economics, 67(1), 55-65.
  • di Giovanni, J. (2005). What drives capital flows? the case of cross-border M&A activity and financial deepening. Journal of International Economics, 65(1), 127-149.
  • Dijkstra, B. R., Mathew, A. J., & Mukherjee A. (2011). Environmental regulation: an incentive for foreign direct investment. Review of International Economics, 19(3), 568–78
  • Egger, P., & Winner, H. (2005). Evidence on corruption as an incentive for foreign direct investment. European Journal of Political Economy, 21(4), 932-952.
  • Ekholm, K., Forslid, R., & Markusen, J. R. (2007). Export-platform foreign direct investment. Journal of the European Economic Association, 5(4), 776-795.
  • Elliott, R. J. R., & Zhou, Y. (2013). Environmental regulation induced foreign direct investment. Environmental and Resource Economics, 55(1), 141-158
  • Erel, I., Liao, R. C., & Weisbach, M. S. (2012). Determinants of cross-border mergers and acquisitions. The Journal of Finance, 67(3), 1045-1082.
  • Fredriksson, P. G., List, J. A., & Millimet, D. L. (2003). Bureaucratic corruption, environmental policy and inbound US FDI: theory and evidence. Journal of public Economics, 87(7-8), 1407-1430.
  • Gallagher, K. P., & Zarsky, L. (2007). The enclave economy: foreign investment and sustainable development in Mexico’s Silicon Valley. Mit Press.
  • Garsous, G., & Kozluk, T. (2017). Foreign Direct Investment and The Pollution Haven Hypothesis (No. 1379). OECD Publishing. https://doi.org/10.1787/18151973
  • Hanna, R. (2010). US environmental regulation and FDI: evidence from a panel of US-based multinational firms. American Economic Journal: Applied Economics, 2(3), 158-89.
  • Hanson, G. H., Mataloni, R. J., & Slaughter, M. J. (2005). Vertical production networks in multinational firms. Review of Economics and Statistics, 87(4), 664-678.
  • Head, K., & Ries, J. (2008). FDI as an outcome of the market for corporate control: Theory and evidence. Journal of International Economics, 74(1), 2-20.
  • Head, K., Mayer, T., & Ries, J. (2010). The erosion of colonial trade linkages after independence. Journal of International Economics, 81(1), 1-14.
  • Hofmann, C., Osnago, A., & Ruta, M. (2017). Horizontal depth: a new database on the content of preferential trade agreements (WPS No 7981). TheWorld Bank.
  • Horstmann, I. J., & Markusen, J. R. (1987). Strategic investments and the development of multinationals. International Economic Review, 109-121.
  • Jang, Y. J. (2011). The impact of bilateral free trade agreements on bilateral foreign direct investment among developed countries. The World Economy, 34(9), 1628-1651.
  • Javorcik, B. S., & Wei, S.-J. (2003). Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth? Contributions in Economic Analysis & Policy, 3(2). https://doi. org/10.2202/1538-0645.1244
  • Javorcik, B. S., Özden, Ç., Spatareanu, M., & Neagu, C. (2011). Migrant networks and foreign direct investment. Journal of Development Economics, 94(2), 231-241.
  • Jin, J., Du, J., Long, X., & Boamah, K. B. (2019). Positive mechanism of foreign direct investment enterprises on China’s environment: Analysis of host country regulation and parent company management. Journal of Cleaner Production, 227, 207-217.
  • Kahouli, B., & Omri, A. (2017). Foreign direct investment, foreign trade and environment: New evidence from simultaneous-equation system of gravity models. Research in International Business and Finance, 42, 353-364.
  • Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The Worldwide Governance Indicators: Methodology and Analytical Issues. Hague Journal on the Rule of Law, 3(2), 220-246.
  • Krautheim, S. (2013). Export-supporting FDI. Canadian Journal of Economics/Revue Canadienne D’economique, 46(4), 1571–1605.
  • Leon-Gonzalez, R., & Tole, L. (2015). The Determinants of Mergers & Acquisitions in a Resource-Based Industry: What Role for Environmental Sustainability? Review of Economic Analysis, 7(2), 111-134.
  • Markusen, J. R., Morey, E. R., & Olewiler, N. D. (1993). Environmental policy when market structure and plant locations are endogenous. Journal of Environmental Economics and Management, 24(1), 69-86.
  • Martinez-Galan, E., & Fontoura, M. P. (2019). Global value chains and inward foreign direct investment in the 2000s. The World Economy, 42(1), 175-196.
  • Martínez-Zarzoso, I., & Oueslati, W. (2018). Do deep and comprehensive regional trade agreements help in reducing air pollution? International Environmental Agreements: Politics, Law and Economics, 18(6), 743-777.
  • Mavisakalyan, A., & Tarverdi, Y. (2019). Gender and climate change: Do female parliamentarians make difference? European Journal of Political Economy, 56, 151-164.
  • Millimet, D. L., & Roy, J. (2016). Empirical tests of the pollution haven hypothesis when environmental regulation is endogenous. Journal of Applied Econometrics, 31(4), 652- 677.
  • Nocke, V., & Yeaple, S. (2007). Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity. Journal of International Economics, 72(2), 336-365.
  • Nuñez-Rocha, T., & Martínez-Zarzoso, I. (2019). Are international environmental policies effective? The case of the Rotterdam and the Stockholm Conventions. Economic Modelling, 81, 480-502.
  • Paniagua, J., & Sapena, J. (2014). Is FDI doing good? A golden rule for FDI ethics. Journal of Business Research, 67(5), 807-812.
  • Pearson CS. (1987). Multinational Corporations, Environment, and the Third World: Business Matters. Duke University Press.
  • Poelhekke, S., & Van der Ploeg, F. (2015). Green havens and pollution havens. The World Economy, 38(7), 1159-1178.
  • Rivera, J., & Oh, C. H. (2013). Environmental regulations and multinational corporations’ foreign market entry investments. Policy Studies Journal, 41(2), 243-272.
  • Rossi, S., & Volpin, P. F. (2004). Cross-country determinants of mergers and acquisitions. Journal of Financial Economics, 74(2), 277-304.
  • Sanna-Randaccio, F., & Sestini, R. (2012). The impact of unilateral climate policy with endogenous plant location and market size asymmetry. Review of International Economics, 20(3), 580-599.
  • Santos-Silva, J., & Tenreyro, S. (2006). The log of gravity. The Review of Economics and Statistics, 88(4), 641-658.
  • Tang, J. (2015). Testing the pollution haven effect: does the type of FDI matter? Environmental and Resource Economics, 60(4), 549-578.
  • UNCTAD (2020). International Investment Agreements Navigator. https://investmentpolicy. unctad.org/international-investment-agreements/
  • United Nations, Department of Economic and Social Affairs, Population Division (2017). Trends in International Migrant Stock: The 2017 Revision. United Nations database (POP/DB/MIG/Stock/Rev.2017).
  • Wagner, U. J., & Timmins, C. D. (2009). Agglomeration effects in foreign direct investment and the pollution haven hypothesis. Environmental and Resource Economics, 43(2), 231- 256.
  • Wang, H., Dong, C., & Liu, Y. (2019). Beijing direct investment to its neighbors: A pollution haven or pollution halo effect? Journal of Cleaner Production, 239, 118062.
  • Wang, Y., Cheng, L., Wang, H., & Li, L. (2014). Institutional quality, financial development and OFDI. Pacific Science Review, 16(2), 127-132.
  • Wang, Y., Sun, X., & Guo, X. (2019). Environmental regulation and green productivity growth: Empirical evidence on the Porter Hypothesis from OECD industrial sectors. Energy Policy, 132, 611-619.
  • Wei, S. J. (2000). How taxing is corruption on international investors? Review of Economics and Statistics, 82(1), 1-11.
  • Xing, Y., & Kolstad, C. D. (2002). Do lax environmental regulations attract foreign investment? Environmental and Resource Economics, 21(1), 1-22.
  • Zugravu-Soilita, N. (2017). How does foreign direct investment affect pollution? Toward a better understanding of the direct and conditional effects. Environmental and Resource Economics, 66(2), 293-338.
Data source: Dialnet