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 …rms to the Clean Air Act Amendments (CAAA), which dramatically strengthened U.S. environmental regulation. Using a panel of …rm-level data over the period 1966-1999, I estimate the e¤ect of regulation on a multinational’s foreign production decisions. The CAAA induced substantial variation in the degree of regulation faced by …rms, allowing for the estimation of econometric models that control for …rm-speci…c characteristics and industrial trends. I …nd that the CAAA caused regulated multinational …rms 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 …nd that heavily regulated …rms 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. …rms to move capital and jobs abroad. The statistical analysis of …rm-level data on U.S. based multinational companies was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintain legal con…dentiality requirements. The views expressed are those of the author and do not re‡ect o¢ cial positions of the U.S. Department of Commerce. The MIT Laboratory for Energy and the Environment provided generous …nancial support. I am indebted to Abhijit Banerjee, Esther Du‡o, Michael Greenstone, Sendhil Mullainathan, and William Zeile. This paper also bene…ted from discussions with David Autor, Daniel Bergstresser, Shawn Cole, Toan Do, Susan Feinberg, Fritz Foley, Andrew Healy, Andrei Levchencko, Byron Lutz, Petia Topalova, the MIT Development Lunch, the Harvard Environmental Lunch, and the Harvard-MIT Environmental Seminar.