DOES CORPORATE INVESTMENT DRIVE A RACE TO THE BOTTOM IN ENVIRONMENTAL PROTECTION? A REEXAMINATION OF THE EFFECT OF ENVIRONMENTAL REGULATION ON INVESTMENT

Many fear that the mobility of corporate investment creates a race to the bottom in international environmental regulations as firms invest in the countries with the weakest environmental protections. But the relationship between environmental regulation and investment is poorly understood. I hypothesize that intercountry institutional distance and firm environmental capabilities moderate the relationship between the stringency of a country's environmental regulations and firms' investment in that country. Analysis of investment in the international automobile industry supports these hypotheses. Study results suggest that attracting corporate investment and preserving local environmental quality need not be opposing policy objectives.