Explaining The Relationship Between FDI and Regulation of Air Pollution: The Role of Domestic Industry and State Commitment to International Agreements

Abstract

This paper examines the relationship between states and transnational companies (TNCs) and attempts to identify how negotiations over FDI affect the regulation of air pollution in the host states. Previous research has considered the direct effect of FDI on state regulation; however, findings associated with this strand of research are mixed. A potential development that this research is offering relates to mediating factors that shape the relationship between FDI inflows and stringency of environmental regulation. The two factors under consideration in this research are the influence of domestic polluting industry on state policy and state commitment to international environmental regime. With the former, an influential enough polluting industry within the host state can contribute towards a weaker negotiating power of the state vis-à-vis the TNC, which will result in looser regulation of air pollution. In terms of the latter, state commitment to international environmental regimes can aid the state in locking in more stringent regulation and increase its leverage in negotiations over FDI and accompanying adjustments in the regulatory environment. The findings suggest that domestic industry has a mediating effect on the relationship between FDI and regulation of air pollution, while state commitment to international agreements does not appear to have a significant effect. Overall, the paper establishes a potential framework to consider various mediating factors that can affect the relationship between FDI and environmental regulation.