MNF and GVC R´ emi Bazillier Introduction

Lesson 2: Multinational Firms’ Location and Global Value Chain Firm Performance and Development Master 2 Development Economics Univ. Paris 1 Pantheon-Sorbonne

R´emi Bazillier 1

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[email protected] http://remi.bazillier.free.fr

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Outline

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

Introduction

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Introduction

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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Are trade liberalisation and increased factor mobility good or bad for the environment?

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Are there larger incentives to relax environmental policies if economies are more open?

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Do we have to expect a race towards the bottom in environmental regulation if trade and international factor movements are liberalised?

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What is the impact of environmental regulations on firm performance

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Interdependence of environmental policies

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Industry lobbies often argue that tight environmental standards and high pollution taxes have a negative impact on competitiveness

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Many environmentalists fear that international differences in environmental policies lead to unfavourable patterns of specialisation, e.g. developing countries becoming pollution havens, and an international downward competition in environmental policies making all countries, in particular the developing ones, worse off

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Early integration of international trade into models of environmental economics: Baumols (1971), Markusen (1975)

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

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Hecksher-Ohlin theory of international trade, the patterns of trade are determined by relative endowment differences I

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Countries relatively well endowed with environmental resources are expected to export environmentally intensively produced (“dirty” commodities)

But the availability of environmental resources is the environmental policy chosen by the country’s government, which in turn is affected by: I I

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Natural abundance: physical endowments (...) Demand for environmental quality: function of income (superior good) Demand for final goods: demand for factors (including environment) is driven by final-goods demand The impact of lobbies The enforcement of environmental policy

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

The patterns of trade in the HOS theorem “A country (on average) exports environmentally intensively produced commodities if it is well-endowed with environmental resources”

The patterns of trade in the HOV theorem “A country well-endowed with environmental resources is a net exporter of environmental services embodied in traded commodities”

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Pollution regulation and comparative advantage (Copeland and Taylor, JEL 2004)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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Pollution haven effect: tightening environmental regulation will, at the margin, have an effect on plant location decisions and trade flows Pollution haven hypothesis: A reduction in trade barriers will lead to a shifting of pollution-intensive industry from countries with stringent regulations to countries with weaker regulations I

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But many other factors, in addition to environmental regulation, affect trade flows If other factors are sufficiently strong, it may exist a pollution haven effect but have the pollution hypothesis fail

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Environmental policy and competitiveness

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Tighter environmental standards are supposed to raise production cost and should be disadvantageous for the industries subject to these standards But this view has been challenged by Porter (1991) [→ The Porter Hypothesis] (see also Porter and van der Linde 1995) I

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Leibenstein’s (1966) X-inefficiency: I

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Firms are pushed to change their production processes and innovate to avoid or limit the effect of the cost induced by the environmental regulation → productivity ↑ may overcome the cost ↑ → ↑ competitiveness If firms are inherently inefficient, tighter environmental standards may make them rethink their production processes and possibly recover efficiency potentials

First-mover advantage: I

Firms adjusting early to tighter environmental standards can outperform late movers in the longer term

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Pollution haven or Porter Hypothesis?

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

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Both theories are contradictory. If environmental regulations are productivity-improving, the pollution haven effect should not be observed. Huge empirical literature to address this issue But observing a shift of polluting industries from developed to developing countries is not enough I

It can simply be the result of the development of the South (capital accumulation)

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Copeland and Taylor (2004)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

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Then, it is interesting to have a closer look to prices of polluting goods I

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If we observe a shift of polluting industries from the North to the South, following a tightening of environmental regulations in the North The World Price should increase, as a result of the price increase in the North (all things being equal) But if the World price is falling, it is the result of capital accumulation in the South (not the result of environmental regulations)

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Copeland and Taylor (2004)

Environmental policy in open economies

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In a small open economy without additional distortions, the optimal environmental policy equalises marginal costs and marginal benefits. I

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The emission tax rate should equal the marginal environmental damage. There is no race towards the bottom.

In a world with interjuridisctional competition, it is not the case: I

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The optimal emission tax rate has two components: the marginal environmental damage and a tax-base effect Since capital is a part of the tax base, governments wish to attract capital by laxer environmental standards The Nash equilibrium, in which all governments choose such a policy, is a prisoners’ dilemma, in which all countries are worse off compared to a situation with Pigouvian taxes.

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

To summarize..

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE

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Environmental regulations are likely to have an effect both on trade and FDI

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But environmental policy is endogenous and may take into account its effects on trade and FDI

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Empirical challenges...

Ederington, Levinson, and Minier (2005), ReStat

Outline

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

Introduction

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Environmental regulation and competitiveness

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Predictions of standard microeconomic theory: strict environmental policies reduce factor productivities and, therefore, are harmful to the international competitiveness of regulated firms I

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Porter hypothesis: environmental regulations should foster innovations and productivity I

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Supported by Barbera and McConnell (1986), Conrad and Morrison (1989), and Gray and Shadbegian (1993) Br¨annlund, F¨are and Grosskopf (1998), using data from the Swedish pulp and paper industry, find only limited evidence that environmental regulation has an impact on firm profitability

Biorn et al. (1997) on Norvegian firms: non-regulated firms have higer probability of existing the market than regulated firms Berman and Bui (2001): same results on US refinery industry

→ Very hard to find a consensus... and no evidence for developing countries

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

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Rezza (2014), “A meta-analysis of FDI and environmental regulations, Environment and Development Economics

R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

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Meta-analysis on existing studies on the topic FDIi,j = θESj + xj0 β + zi0 δ + ηi,j

(1)

With ES regulatory stringency in j, xj a vector of time-varying attributes of jurisdiction j, zi a vector of timev aryingattributesofthefirmandindustry ,ηi,j an idiosyncratic disturbance that varies with jurisdiction and firm

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

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Studies of FDI and PHH can be divided in two groups: I

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a first group tests whether jurisdictions that have less stringent environmental regulations attract more FDI (θ should be negative) the second group investigates the PHH by testing whether more pollution-intensive firms or industries shift their production activities to countries that have lenient environmental regulations (θ should be positive (pollution intensity in place of regulatory stringency)

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

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First: estimate of the following probit model [Yg = 1|C ] = Φ(δ0 + C 0 δ)

R´ emi Bazillier

(2)

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

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It investigates the factors that determine whether estimates have a sign favoring the PHH and whether it is statistically significant.

Then, equation is extended to differentiate among (i) the estimates that support the PHH, (ii) those that are statistically insignificant, and (iii) those that corroborate the Porter (1991) hypothesis using a categorical effect size indicator as the dependent variable I

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Categories are labeled 1,0 and -1 respectively, and a 10 percent significance level Each estimate is weighted by the inverse of its variance (Lipsey and Wilson 2001). Estimates with smaller variance are more reliable and should have more weight in the regression

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Rezza (2014)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Rezza (2014)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Rezza (2014)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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Six studies investigating the PHH in the US, the others in Africa, Asia or Europe

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18 studies followed the first strand of the literature (examining whether less stringent regulations attract more FDI)

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3 studies the second one (whether pollution-intensive firms are more likely to undertake outward FDI

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Rezza (2014)

Explanatory variables

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Stringency of environmental regulations

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Rezza (2014)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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Number of proxies (of environmental regulations) used Definition of FDI I

New plant establishment, flow of capital, stock of capital, employment

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Firms’ pollution level

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Development level of the recipient country

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Endogeneity

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Simultaneity I

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If FDI inflows increase countries’ incomes and environmental quality is a normal good, incoming FDI could foster voters’ demand for stricter environmental regulations

Reverse causality I

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If environmental regulations are set strategically to attract inflows of FDI (see, for instance, Fredriksson et al., 2003; Cole and Fredriksson, 2009). “Those states that do not attract a lot of polluting manufacturing probably do not enact stringent regulation - there simply is less need to worry about industrial pollution in states with less industrial activity, and those states that do attract polluting manufacturing may respond by enacting more regulation” (Keller and Levinson 2002)

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Rezza (2014)

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Results

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The likelihood of gaining results that support pollution haven increase by: I I I I

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defining FDI as the establishment of a new plant(s) employing panel data on the regressions not taking into account the effect of wages employing a government’s environmental spending as a proxy for the stringency of environmental regulations

Focusing an investigation on pollution-intensive industries may not increase the likeliness of finding results that support the PHH I

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This finding agrees with those of Ederington et al. (2005) and Cole et al. (2010) these types of firms (industries) may not be geographically mobile because of transportation or plant fixed costs Polluting industries may also be constrained in their location choices because of natural resources availability

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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No specific results for developing countries I

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“Because developing countries are at the center of the PHH debate, as proven by almost half of the sampled studies that observed the PHH from the viewpoint of a developing country, this finding implies that pollution havens might just be, as Javorcik and Wei (2004) state, a popular myth” Most FDI flows occur among developed countries

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Outline

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

Introduction

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Eskeland, G.S. Harrison, A.E. (2003) “Moving to greener pastures? Multinationals and the pollution haven hypothesis”, Journal of Development Economics, vol. 70(1), pages 1-23

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

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Model: I

depending on possible complementarities between capital and pollution abatement, environmental regulation could lead to an increase or a decline in investment in both the host (developing) country and the originating (developed) country

Eskeland, G.S. Harrison, A.E. (2003) “Moving to greener pastures? Multinationals and the pollution haven hypothesis”, Journal of Development Economics, vol. 70(1), pages 1-23

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE

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Empirics: I

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Determinants of FDI inflows in four host countries (Cote d’Ivoire, Morocco, Mexico, and Venezuela) Comparison of the behavior of multinational firms in developing countries with their counterparts in the host country (emissions behavior of foreign and domestic plants within the same manufacturing sector) Pattern of outbound U.S. investment during the 1980s and early 1990s: If environmental legislation in the 1980s led to higher costs of doing business in the United States, then we would expect that foreign investment leaving this country would be concentrated in sectors where pollution abatement costs are significant.

Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Eskeland and Harrison (2003)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Eskeland and Harrison (2003)

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Across all specifications, pollution abatement costs do not have a systematic impact on the pattern of foreign investment I

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Although there is a significant positive relationship between abatement costs and foreign investment in Cote d’Ivoire, the relationship is significant and negative for Venezuela. Both relationships become insignificant with the introduction of fixed effects

In all four countries, the single biggest draw for foreign investors was the size of the domestic market. Foreign investors tend to concentrate in sectors with large total sales.

Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Using measures of pollution intensity

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

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Total particulates (a measure of air pollution)

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Biological oxygen demand (a broad measure of water pollution)

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Total toxic releases

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Emission intensities: emissions divided by the total output of the firm → sector-specific emission intensities for the three pollutants

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

Figure : Industries which on average have high abatement costs typically also emit toxic substances

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Eskeland and Harrison (2003)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Eskeland and Harrison (2003)

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The relationship between emissions and the pattern of foreign investment is either insignificant or negative I

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high levels of water pollution (proxied by BOD), for example, are associated with less foreign investment, not more. The only exceptions are toxic emissions in Cote d’Ivoire and air pollution in all three countries (SUSSPART is significantly and positively correlated with the pattern of foreign investment)

Using measures of emissions instead of actual abatement costs, we conclude that there is some evidence that high-emission sectors attract foreign investors I

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There is a significantly positive association between air pollution and the pattern of foreign investment in several countries, even after controlling for other factors However, using other measures of emissions, such as measures of water pollution or toxicity, the pattern is reversed: foreign investment is less likely in sectors where emissions are higher

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

The impact of pollution abatement costs on U.S. outbound foreign investment

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

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If environmental legislation has led to higher costs of doing business in the United-States, then we would expect that foreign investment leaving this country would be concentrated in sectors where pollution abatement costs are high

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One simple way to test this hypothesis is to measure the statistical correlation between the pattern of outbound foreign investment and pollution abatement costs across different sectors

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Eskeland and Harrison (2003)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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Pollution abatement expenditures are only a small fraction of overall costs I

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In the dirtiest industries, abatement costs accounted for less than 10% of value-added Other factors (such as market size or political risk) are simply more important in determining industrial relocation

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Outline

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

Introduction

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Ederington, Levinson, and Minier (2005), Footloose and Pollution-Free, Review of Economics and Statistics

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE

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Test several common explanations for why the effect of environmental regulations on trade may be difficult to detect 1. Most trade takes place among developed countries, which share similarly high levels of environmental stringency 2. Some industries are less geographically mobile than others, due to transportation costs, plant fixed costs, or agglomeration economies I

These less mobile industries will be insensitive to differences in regulatory stringency between countries

3. For all but the most heavily regulated industries, environmental regulation represents only a small portion of total production costs

Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Ederington et al. (2005)

→ A 20% increase in the environmental costs faced by an industry, relative to other industries, is associated with less than a 1% increase in net import penetration in that industry

1. Trade with low standards countries / developing countries

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Ederington et al. (2005)

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness

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→ Although an increase in U.S. environmental costs will not have a significant effect on trade with other OECD countries, it will lead to a statistically significant increase in net imports from developing countries the implied elasticity is approximately 0.2 for trade with non-OECD countries (approximately 5 times greater than the elasticity for the full sample)

Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

2. Footloose industries

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

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Pollution-intensive industries tend to be less geographically mobile, or footloose, than other industries Three potential determinants of immobility I

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Transportation costs in product markets (freight costs, controlling for the distance shipped) Plant fixed costs (data from the NBER-CES Manufacturing Industry Database of Bartelsman, Becker, and Gray on real capital structures in an industry) Agglomeration economies (index of geographic concentration of U.S. manufacturing industries from Ellison and Glaeser (1997))

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Ederington et al. (2005)

MNF and GVC R´ emi Bazillier Introduction

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For an industry which has the median level of all three immobility measures, an increase in environmental costs of 1 percentage point would result in a decrease in net imports of 0.96 percentage points (an implied elasticity of approximately 0.2) In contrast, in a less mobile industry (in the top 20th percentile of all three measures of industry immobility), the same increase in environmental costs would result in a decrease in net imports of only 0.2 percentage points (an implied elasticity of only 0.04)

Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

3. Small environmental costs

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

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Inclusion of the interaction between the average environmental costs in an industry and the current level in any year I

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If industries that pollute more were more sensitive to environmental cost increases, the coefficient on this interactive term would be positive It is not the case (coefficient is negative): the effect of an increase in environmental costs is actually smaller in the more pollution-intensive industries

→ The lack of geographic mobility on the part of pollution-intensive industries

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat

Source: Ederington et al. (2005)

Conclusions

MNF and GVC R´ emi Bazillier Introduction Empirical Evidence

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Lack of empirical support for the PHH I

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Estimating the average effect of an increase in environmental costs over all trade flows understates the effect of environmental regulations on trade with low-income or low-standard countries Estimating the average effect of an increase in environmental costs over all industries understates the effect that regulatory stringency has on trade in the geographically mobile (footloose) industries polluting industries also appear to be relatively immobile No evidence for the third hypothesis, that trade flows are more sensitive to changing environmental regulations in the more pollution-intensive industries

Environmental regulation and competitiveness Rezza (2014), EDE Eskeland and Harrison (2003), JDE Ederington, Levinson, and Minier (2005), ReStat