Is there evidence of PHH in developing Asia?
| Published date | 04 February 2019 |
| DOI | https://doi.org/10.1108/JCEFTS-06-2018-0018 |
| Pages | 20-39 |
| Date | 04 February 2019 |
| Author | Rania S. Miniesy,MennaTallah Tarek |
| Subject Matter | Economics,International economics |
Is there evidence of PHH
in developing Asia?
Rania S. Miniesy
Department of Economics, The British University in Egypt, Cairo, Egypt, and
MennaTallah Tarek
Department of Business Administration, The British University in Egypt,
Cairo, Egypt
Abstract
Purpose –This paper aims to testthe pollution haven hypothesis (PHH) in developing Asiancountries by
examining whether lax environmentallaws are a determinant of foreign direct investment (FDI) inflowsinto
these countries, whichare characterised by being the largest FDI recipients among developingcountries and
also by being amongthe most highly polluted and the highest carbon dioxide (CO
2
) emitters worldwide.
Design/methodology/approach –Panel data for the main determinants of FDI inflows including a
carbon dioxide emissions and an agglomeration variable are collected forall developing Asian countries for
the 1996-2016period and a fixed effects model with robust standard errors is used.
Findings –Results show that lax environmentallaws are a significant determinant of FDI inflowsfor the
selected Asian countriesas a whole. A closer look shows that this resultcannot be generalised for the whole
region, but applies particularly to three countries China, Hong Kong and the Philippines. PHH is thus only
partiallysupported.
Originality/value –FDI is a main engine of growthfor developing countries. However, it might adversely
affect them, specificallyin terms of environmental deterioration in the absence of stringent and well-enforced
environmentalpolicies. Some developing countries might even deliberatelyrelax their environmental policies
to attain comparativeadvantage especially in polluting industries and thus attractFDI. This leads to serious
repercussionsand might eventually limit growth, where augmentingit was the intention in the first place.
Keywords FDI, Environmental regulations, CO
2
emissions, Developing Asian countries,
Eclectic paradigm, Pollution haven hypothesis
Paper type Research paper
1. Introduction
Economic growth in developing countries is in most cases curbed by the lack of capital.
Obtaining foreign direct investment (FDI) is one of the remedies prescribed to get over this
problem. FDI not only adds to the national capital stock but also has many other potential
advantages. These advantages include creating job opportunities, enhancing overall
productivity generated by technological and knowledge spill-overs, increasing tax revenue,
instigating a favourable balance of payments especially if augmented by exports and
forming growth-stimulating backward and forward linkages with local businesses
An earlier version of this research was presented at the EBES 23rd conference held in Madrid, Spain,
September 27th-29th, 2017. The authors would like to thank Professor Giuseppe Ciccarone, the Chair
of the session, Associate professor Lourdes Moreno Martín as well as other participants for their
valuable comments. They would also like to thank Dr Hossameldin Ahmed for his insights regarding
their econometrics inquiries. Last by not least they would like to thank Professor John Adams for his
comments on earlier versions of this paper.
JCEFTS
12,1
20
Journalof Chinese Economic and
ForeignTrade Studies
Vol.12 No. 1, 2019
pp. 20-39
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-06-2018-0018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
(Clunies-Ross et al., 2009). However, many of these advantages may not be realised and FDI
may even adversely affect the host country if the right policies are not in place.
The relation between FDI and the environment of the host country gained a huge
momentum relatively recently and resulted in the birth of a number of hypotheses. One of
these hypotheses is the pollution halo hypothesis, which claims that FDI from developed to
developing countries, through the transfer of new and probably cleaner technologies,
improves their environmental quality. A race to the top with better environmental quality
worldwide is thus the logical corollary. An opposing hypothesis is the pollution haven
hypothesis (PHH), which holds thatFDI from developed to developing countries takes place
because the former have stringent environmental laws that raise their firms’costs of
production and thus they invest in the latter to escape thesehigh costs. A corollary of this is
arace to the bottom where developing countries deliberately neglect the quality of their
environment to attractmore FDI (Mihci et al.,2005).
The aim of this research is to investigate the PHH in developing Asian countries by
examining whether lax environmental regulations is one of the determinantsof FDI inflows
into these countries during the period from 1996 to 2016. This paper adopts a holistic
approach, where the interest is in the “bigger picture”and not on the specifics of every
country or of every industry.This is particularly interesting because manystudies used this
approach when inspecting the determinantsof inward or outward FDI in general but rarely
when lax environmental regulations is the main concern or one of the determinants
scrutinised. The reason developingAsian countries are chosen is that they are not only the
largest recipients of FDI among developingcountries but among the most polluted and also
the largest CO
2
emitters. Moreover, not manystudies have investigated these countries as a
whole and have usually concentrated on one (usually China) or more countries and not for
such a long period. Furthermore, previous studies have ignored the agglomeration effect
(with the exception of Wagner and Timmins, 2009), a factor that may have biased the
results. This paper fills thesegaps in the literature.
This analysis is important because if the PHH is confirmed, it will provoke
environmental deterioration and depletion of developing countries’resources (Badri and
Parvizkhanlu, 2014),which will stifle their economic growth in the long run, the main reason
for which they sought FDI in the first place.Furthermore, the subsequent race to the bottom
highlights the gravity of this outcome on the quality of the already fragile environment
worldwide and raises serious questions regarding the strength of the international
environmental agreements such as the Montreal or the Kyoto protocols where dirty
industries relocate to non-member countries rather than becoming totally prohibited
(Wagner and Timmins, 2009)orfinding greener alternatives.The conclusion is important to
policy makers, economists,environmentalists and the general public.
The paper is organised as follows: Section 2 lays the background with respect to
developing Asian countries’inward FDI and environmental status. Section 3 gives a very
brief overview on the theories behind FDI. Section 4 then reviews the literature concerning
the PHH. Section 5 presents the hypothesis and the variablesused in the model followed by
Section 6 where the model is explained the resultsanalysed. Finally, Section 7 concludes the
paper.
2. Background
2.1 FDI in developing Asian countries
Global FDI inflows have varied significantly during the past 20 years. According to
UNCTAD’s 2017 data, as shown in Figure 1,FDIinflows increased during the 1996-2000
period, then started to fall reaching its lowest values in 2003, increased again reaching its
Evidence of
PHH
21
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