The Effect of Environmental Regulation on the Locational Choice of Japanese Foreign Direct Investment

Abstract

This paper assesses the impact of environmental regulation in host countries on Japanese foreign direct investment decision-making. It tests the pollution haven hypothesis using data on national environmental regulation standards and Japanese inward FDI in five dirty industries. The results do not support the pollution haven haven hypothesis. On the contrary, inward Japanese FDI appears to be attracted to countries which have committe themselves to a tranparent and stable environmental regulatory environment, suggesting that the quality of the regulatory framework in terms of its certainty and transparency has a greater influence on foreign investors' choice of location than the level of eht environmental regulation measures.