Is the “race to the bottom” of regulation a real phenomenon—do countries with less environmental regulation policies attract more foreign investment?



  1. 0 Votes

    Good question. The answer “it depends” sounds like a cop-out, but it’s really the only correct one. I’m wary of attributing any one monolithic behavior to businesses or investors because different types of business entities will make decisions based on totally different factors. Surely, the “cost of doing business” is one major factor in such decisions, and increased costs from environmental regulations is part of that overall cost. Is it the main or the only factor? Probably not, unless you have a very specific type of business. India has less air quality laws than do the United States, so I doubt you would see an overseas energy magnate wanting to build a coal-fired electricity plant choose to build his plant in Detroit rather than Bombay, but that’s an extreme example and there are probably other reasons why that decision wouldn’t make sense. Yes, large multinational industries do tend to establish operations in places where there are fewer regulations, including environmental regulations, but is it fair to attribute the incentive for those decisions to be those specific regulations and not something else, such as the cost of labor? If I’m an executive for Nike and I’m looking to build a new shoe factory, I probably will go to Malaysia before I’ll go to Peoria, but that’s probably because labor in Malaysia is cheaper and taxes are lower there than in Illinois. So I’m not sure it’s fair to characterize it as a “race to the bottom” based on environmental regulation. Economics is a lot more complicated than that.

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