DRI Working Paper No. 23
By Rema Hanna, Graduate School of Public Service, New York University

U.S. Environmental Regulation and FDI: Evidence from a Panel of U.S. Based Multinational Firms
This paper measures the response of U.S. based multinational firm to the Clean Air Act Amendments (CAAA), which dramatically strengthened U.S. environmental regulation. Using a panel of firm-level data over the period 1966-1999, I estimate the effect of regulation on a multinational’s foreign production decisions. The CAAA induced substantial variation in the degree of regulation faced by firm, allowing for the estimation of econometric models that control for firm-specific characteristics and industrial trends. I find that the CAAA caused regulated multinational firm to increase their foreign assets by 5.3% and their foreign output by 9%. In aggregate, this increase represents approximately 0.6% of the stock of multinationals’ domestic assets in polluting industries. Contrary to common beliefs, I find that heavily regulated firms did not disproportionately increase foreign investment in developing countries. Finally, this paper presents limited evidence that U.S. based multinationals increased imports of highly polluting goods when faced with tougher U.S. environmental regulation. Overall, these results are consistent with the view that U.S. environmental regulations cause U.S. firm to move capital and jobs abroad.