The Effect of Lax Environmental Laws on Foreign Direct Investment Inflows in Developing Countries

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This paper investigates the effect of lax environmental laws on foreign direct investment (FDI) inflows in developing countries. Lax environmental laws in host countries may attract polluting FDI that usually escapes from stringent environmental laws in home countries. This is examined in a dynamic panel data model. For that, a fixed effect panel data model with homogenous slope is used. Besides the traditional determinants of FDI inflows, the effect of human capital and environment on FDI is tested. The empirical results indicate that a) lax environmental laws are a statistically significant determinant of FDI inflows. b) Lax environmental laws are the most influential determinants of FDI inflows in developing countries. c) Human capital is not a statistically significant determinant of FDI inflows in developing countries. In addition to these results, policy implications for developing countries are given. This is very essential in order to solve the ongoing dilemma of how to promote FDI inflows without leading to environmental degradation.