Resource title

Foreign Direct Investment and Environmental Taxes

Resource image

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Resource description

This paper discusses environmental policies in response to foreign direct investment (FDI) in a symmetrie two-country setting, where firms' behavior affects government policy decisions. We show that two alternative equilibria with FDI are possible: (i) one with unilateral FDI, where one firm is a multinational firm, and the other firm is a national firm; (ii) and one with bilateral FDI, where both firms become multinational firms. With regard to strategic environmental policies, we show that the country attracting FDI introduces a Pigouvian environmental tax, whereas the country served by the local firm only levies a smaller tax rate. Hence, FDI does not lead to ecological dumping. With regard to welfare, we show that the impact on welfare is negative for the country hosting the national firm; positive for the country hosting the multinational firm, if FDI is unilateral; and ambiguous, for both countries, if FDI is bilateral.

Resource author

Roberto A. De Santis, Frank Stähler

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/17712

Resource license

Adapt according to the presented license agreement and reference the original author.