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Multinationals and environmental regulation: are foreign firms harmful?

Published online by Cambridge University Press:  31 January 2012

Evangelina Dardati  and
Meryem Saygili
Evangelina Dardati
Affiliation:
Complex Engineering Systems Institute and Center for Applied Economics, University of Chile, Santiago, Chile. Email: edardati@dii.uchile.cl
Meryem Saygili
Affiliation:
Department of Economics, University of Texas at Austin, 1 University Station, C3100 Austin, TX 78712, USA. Email: tekinmrym@gmail.com
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Abstract

The rise of globalization has directed the attention of economists to the effect of trade and multinational production on the environment. We explore whether multinational firms, frequently the target of environmentalists, are harmful for a host country's environment. We introduce environmental regulation in a two-country model of heterogeneous firms with monopolistic competition. Using plant-level data from Chile, we test the model implications. We find that foreign firms are cleaner than domestic plants even after controlling for productivity that is likely to be negatively correlated with emissions. We also show that increasing the stringency of environmental regulations in a previously unregulated market affects the domestic firms more than the multinationals.

Type
Research Article
Information
Environment and Development Economics , Volume 17 , Issue 2 , April 2012 , pp. 163 - 186
Copyright
Copyright © Cambridge University Press 2012

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