Kiel Working Papers, Kiel Institute for World Economics
No 1013:
Foreign Direct Investment and Environmental Taxes
Roberto A. De Santis and Frank Stähler
Abstract: 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.
Keywords: Foreign direct investment, environmental. taxes, multinational enterprises, plant location.; (follow links to similar papers)
JEL-Codes: F12; F18; F23; Q20; (follow links to similar papers)
33 pages, October 2000
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