Strategic environmental policies in the presence of foreign direct investment

M. Özgür Kayalica*, Sajal Lahiri

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

34 Citations (Scopus)


We analyze strategic environmental standards in the presence of foreign direct investment. A number of foreign firms located in a host country compete with a domestic firm in another country to export a homogeneous good to a third country. When the number of foreign firms is exogenous, the host country applies a stricter environmental regulation than the other producing country. However, under free entry and exit of foreign firms, the host country may apply a less severe standard under both non-cooperative and cooperative equilibrium. We also find that the nature market structure does not affect the equilibrium values of total pollution if export subsidies are also used.

Original languageEnglish
Pages (from-to)1-21
Number of pages21
JournalEnvironmental and Resource Economics
Issue number1
Publication statusPublished - Jan 2005


Lahiri’s research was funded by a research grant (R000222728) from the Economic and Social Research Council of the United Kingdom. The authors are extremely grateful for very helpful comments to two anonymous referees, Manolis Petrakis, Charles Perrings, Carlo Pettinato, Pierre Regibeu, Rafael Reuveny and Somnath Sen, and to the participants at the FEEM Workshop on Trade and the Environment, and at the annual conferences of International Economics and Finance Society (UK), European Association of Environmental and Resource Economists, Middle East Technical University Economic Research Centre, and the International Water and Resource Economics Consortium & the Seminar on Environmental and Resource Economics.

FundersFunder number
Economic and Social Research Council of the United Kingdom


    • Emission permits
    • Environment
    • Foreign direct investment
    • Pollution
    • Trade


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